Zimbabwe dollar and the multi-currency regime

Zimbabwe’s economy has stabilised since using the multi-currency regime but can this stay forever?, many people especially the governement has been talking about bringing Zimbabwe dollar ( pictured) back, this leaves many people scrared because of the mention of the return of the Zimbabwean dollars. Few years ago Zimbabweans endured hours in bank queues trying to get their hard-earned cash.It brings back memories of prices going up on an hourly basis and basic commodities disappearing from the shelves.

Yet in less than two years’ time, Zimbabwe has to make a choice for a currency. Government has said the multiple currencies regime – credited for stemming hyperinflation – runs up to 2012.Industry and Commerce Minister Welshman Ncube upped the ante telling business executives in Bulawayo recently that Zimbabwe has to join the Rand Monetary Union.

Although multiple currencies are credited for stemming hyperinflation, it has brought with it distortions especially on the cross rates.Another problem with the multiple currencies regime is that some retailers
are only accepting the US dollar and can only take the rand on an exchange rate of US$1: R10.

Analysts say a cost-benefit analysis has to be undertaken before a nation jumps onto which currency to use.According to a United Nations Development Programme (UNDP) series document released last year, Zimbabwe has to join the Common Monetary Area (CMA) that uses the rand as its currency to lure cross-border trading by South African financial institutions.

The UNDP working paper, Recovery of the Financial Sector and Building Financial Inclusiveness, said joining the CMA has more advantages than using the US dollar as an official currency as Zimbabwe trades more with South Africa than it does with the United States.”The crucial advantage of joining the CMA is that Zimbabwe will have access to the South African capital and money markets and a right to enter into bilateral agreements with South Africa and be able to avail itself of temporary central banking facilities of the South African Reserve Bank,” the report said.

The CMA comprises South Africa, Namibia, Swaziland and Lesotho.Should Zimbabwe join the CMA, it will have to subscribe to these tenets of the Multilateral Monetary Agreement.Monetary policy will be conducted within the framework of the agreement, which in essence means loss of monetary independence. If Zimbabwe joins the CMA, the exchange-control provisions of every party to the agreement must be substantially in accord with those in South Africa. The management of gold and foreign-exchange reserves must also be similar in all member countries, the working paper said.Debate on the currency has always whipped emotions and the return of the local currency cannot be ruled out.

President Robert Mugabe said last year the local unit can be revived soon.A currency is viewed as a national flag and a symbol of sovereignty. While politicians are angling for the return of the local currency, the region is moving towards integration and is mulling a regional currency. Economist Brains Muchemwa argues that government should focus on enhancing the capacity of the economy to produce and be competitive and pay little attention to making pronouncements that could be counter-progressive. “Eventually, the multi-currency system may be phased out, but the process will need to be gradual,” he said.Muchemwa said the use of multiple currencies has brought about pricing stability and has taken away the central government’s ability to print money.

He said government must not rush to bring back the local currency when the country is still battling with sizeable budget deficits. Biti recently said that the US$810 million vote of credit has not performed
according to expectations and there is a hole of over US$600 million.”The temptation to stimulate growth via the fiscal stimulus becomes great and without much choice, the printer will become the next best alternative and in the process the destructive influence can begin once again,” Muchemwa said. Reserve Bank of Zimbabwe governor Gideon Gono told Standardbusiness on the sidelines of Sadc central bank governors meeting early this month that there are political, cultural, legal, constitutional and other factors that cannot be wished away in the debate or aspiration towards a single currency. He said although there is an EU bloc using the Euro, one of its members, Britain has kept its currency.

“Why? Maybe it’s for constitutional reasons; maybe it’s sentimental, maybe it’s simply for nationalistic reasons. We will need to go through all these but there is absolutely no doubt about the benefits of a single currency,” he said.