EDITORIAL COMMENT: ZiG drop stressed need to speed up single currency

IF Zimbabwe, like almost every other country in the world, oper­ated for all internal purposes with a single currency, that currency would be reasonably strong and inflation would be low.

Our challenge is that we operate in what is effectively a dual currency system, although it is called multi-cur­rency, but basically is just the US dollar and the ZiG.

People are allowed to buy goods and services in the currency of their choice and are allowed to stack up cash, physically and in bank accounts, in the currency of choice.

At the base of our internal market, and the problems of that market, is the desire to buy as much as possible in ZiG, but stack up as much as possible in US dollars and spend as little as pos­sible in that currency. This produces curious stresses and strains on the ZiG.

Accompanying that are subsidiary pressures, but these are largely limit­ing. Some want to stockpile imports and imported raw materials, but there is a limit as you can only buy a certain amount in advance.

At the root of the 42,55 percent devaluation at the end of last week was, as Reserve Bank of Zimbabwe Gov­ernor Dr John Mushayavanhu made clear, the dual currency system that allows those holding foreign currency to spend that directly, without first con­verting to ZiG, and to store any foreign currency they have earned in their nos­tro or foreign currency accounts, and perhaps never convert it.

The interbank market is supported by sales from the Reserve Bank of part of the 25 percent that all exporters must convert as the money arrives in Zim­babwe.

That sort of sale is permitted under international best practice, but it should be just to even out the peaks and troughs. Hence the change in ZiG values at the end of last week, to reduce pressure and make it cheaper to buy.

Yet the fundamentals for a respecta­ble local currency are now all in place. There is a positive balance of payments, that is more foreign currency flows into Zimbabwe than flows out, and the Government lives within its income, that is it spends what it gets in taxes and does not create any additional money out of thin air.

This has been the case for several years now, as part of the economic reforms of the Second Republic along with its tight accounting, proper budg­eting and general tightening up.

The positive balance of payments is even the case this year when food imports have risen, while agricultural exports have slowed.

The falling global mineral prices have been more than compensated by rising volumes and greater processing of minerals before export.

A positive balance of payments in a bad year is a fairly strong guarantee that in better years there would be a very healthy balance of payments and allowing more reserves to be built up and more money available for capital expansion.

The other fundamentals have been fixed by the Second Republic. The Government lives within its income, that is essentially what everyone pays in taxes and duties.

The small amount of borrowing is proper borrowing, not money crea­tion by some form of electronic print­ing, and is only for part of the capital budget, and even then for parts where an immediate source of income is gen­erated so that the debt can be paid off.

So you cannot borrow to build hos­pitals or clinics and schools, at least not in the public sector, as these will never earn enough money from fees to pay off the debt and so are the sort of social capital expenditure that must come like all current spending from the cash budget.

But this is not just recognised in the Government, but has been the mainspring of the exceptional fiscal discipline seen since 2018.

Although historically printing money for the Government was the main source of money creation, the fact that money supply continued to grow, if at slower rates, when that particular tap was turned off showed that it was not as simple as it looked.

For the past 18 months there has been a determined effort by the Gov­ernment and Reserve Bank to find the last taps.

At the same time as the ZiG was launched in April, the Government and Reserve Bank went after the black market, cleaning the dealers off the streets and using the Financial Intelli­gence Unit to hunt down the accumu­lators and the major dealers, largely successfully.

The Friday decision was not a result of the black market, which now accounts for less than 5 percent of foreign currency transactions, or the virtual rates it quotes, but rather that those with foreign currency are not selling in either market, but rather spending directly and storing the sur­plus.

That is the exchange rate had to be adjusted because there was a dual currency economy, almost a dual economy, and the two parts had to be reunited.

The underlying problem, once the fundamentals have been fixed as is now the case, is to move far more rapidly towards a single currency market.

There are some, and they have emerged out of the woodwork again, who want Zimbabwe to use the US dollar solely, even though that means exceptionally low liquidity, an eco­nomic slump and then zero growth.

We tried that before and it almost wiped out our industry and then clamped down on growth.

Others have suggested a big bang, one day we just switch over to local cur­rency for everything, but that would be extremely dislocating, as well as regret­tably allowing organised crime to get a grip via a panic-stricken black market.

So it appears we have to continue moving towards that single internal market using a single currency while making sure that exporters can have guaranteed access to necessary foreign currency, their own or bought, to earn the rest and that the interbank mar­ket can be built up to run the system with the Reserve Bank just being what central banks are, the smoother and regulator of markets.

But it also appears that the authori­ties now need to think hard on how to accelerate this progress.