Zimbabwe has been operating without a national currency for more than a year now. Since the formation of the Government of National Unit the Zimbabwe dollar (Zimdollar) was replaced by a multi currency system which has somehow brought about stability in addition to a liquidity crunch that has affected all sections of the Economy. Whilst many Zimbabweans still emotionally feel the Zimdollar should remain banished Economic reality and facts on the ground indicate that the Zimbabwe dollar maybe one of the few options that the country has considering the lack of donor and other international funds.
The Zimdollar collapsed dramatically after extended periods of excessive currency printing. In short there was a run on the currency after the Reserve Bank became father Christmas before during and after Christmas by funding any activity by printing money. This indicates that there maybe a need for personnel change at the Central Bank before a new Zimdollar is re-introduced. It is a bit far fetched to expect the new currency to survive when its essentially under the same custodians.
Whilst the multi-currency system has brought about price stability it has brought a serious liquidity and credit crunch that has slowed down economic recovery.
The absence of a local currency means Zimbabwe does not have a monetary policy of its own. This is worsened by the fact that the basket of multiple currencies are from Economies whose fundamentals are markedly different from Zimbabwe .This in economic terms is tantamount to artificially inflating a currency when you do not has sufficient reserve4s to defend the currency. The net effect is lack of liquidity and depressed economic activity as business and the economy is deprived of necessary c4edit to fund operations.
Zimbabwe’s Economy is approaching emerging market status and is best driven by exports due to abundant natural resources. Such a strategy requires Zimbabwe to use a soft currency which can be depreciated in a managed way to remain competitive in the export markets.
The use of a basket of multiple currencies totally eliminates the potential of using the weak and soft currency as a tool to encourage exports. This is so because the exporters can not use a cheap local cost base to manufacture and add value to exports with hope of getting hard currency which can then be exchanged for local currency. In short the incentive of exporting is eliminated from most activities and local producers are forced to compete with other producers all over the world without the benefit of a local currency which is managed to their advantage.
This is the current source of some friction between the USA and China with the Americans demanding that China floats its Yuan with the hope that the Chinese currency will end up firming thereby making China’ exports less attractive to Americans.
A weak and soft currency normally favours the exporting nation as its exports are relatively cheap and fuel production as producers seek to earn more hard currency. This what Zimbabwe is missing out on. The use of multiple hard currencies is eliminating this route for Zimbabwe thereby slowing down the economic recovery.
Obviously the IMF ,World Bank and Friends will be only too happy for Zimbabwe to keep using the multiple currencies whilst calling for more reforms but failing to deliver and meaningful funding. The way out for Zimbabwe is to de-politicize the Reserve Bank of Zimbabwe and start re-building confidence in the Central Bank ahead of re-introducing the Zimdollar.
This article appears as courtesy of GMRI Capital ( http://www.gmricapital.com ) prepared for 3MG MEDIA
Gilbert Muponda is a Founder and CEO of GMRI Capital ( http://www.gmricapital.com ). He can be reached at;
Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda
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