adminDr Bongani Ngwenya
Preamble:
WHILE the message that Zimbabwe is now open for business has been consistently repeated by His Excellency President Mnangagwa in his regional and international tours, including the 48th edition of the World Economic Forum in Zurich, Switzerland there is still a need to clarify issues of currency and the liquidity situation in the economy.
As President Mnangagwa met several high profile businesspeople in Zurich, Switzerland, he took the opportunity to apprise them of the country’s compelling business and investment story that he has consistently articulated since his coming into office.
For those of us in Zimbabwe, in the region and the international community who welcome and support the investment and development drive by President Mnangagwa and his Government, however, are concerned that there still remain issues to be worked through.
If Zimbabwe is to secure an economic future that relies on more than asset price inflation and import inflation, that is, in the absence of meaningful production that the economy is experiencing (there could be no cost-push or aggregate demand lead inflation to talk about) and an unsustainable consumer boom that is currently managed largely through imports, there is a need for a new approach to monetary policy so that the power of Government can be used to stimulate the much needed domestic investment in greater productive capacity and full employment. Secondly, any strategy for sustainable economic growth and increased domestic and foreign direct investment will be frustrated unless the main inhibition to any policy for growth — that is, the damaging and long-term loss of monetary policy role of the Government and credit creation by commercial banks in this country since the adoption of the multi-currencies, suffered by Zimbabwe is overcome.
Lack of role of monetary policy and credit creation:
The main role of monetary policy has been seen for decades as simply the control of inflation and the control of supply of money or liquidity in the economy. That function has been contracted out of the Reserve Bank of Zimbabwe since the adoption of the multi-currencies and is accordingly beyond the reach of democratic accountability.
Even in terms of this limited goal, however, the adoption of multi-currencies has created a major distortion in the economy.
By far the greatest proportion of the money in our economy is not created by the commercial banks, who are expected on the other hand to lend out on mortgage and also for productive purposes. The country’s commercial banks have not been able to meaningfully lend especially for productive purposes, instead have preferred lending for consumption rather than for productive investment.
The Government’s role in monetary policy, in situations or cases of existence of a sovereign or a domestic currency is extended to the “quantitative easing” (or, more pejoratively, “printing money”) for productive purposes when necessary. When Zimbabwe adopted multi-currencies, the Government ceded that right. The post-war Japanese economic miracle, for example, was largely founded on an application of the Keynesian insight that new money provided for investment purposes cannot be inflationary as long as it is matched by a corresponding increase in output over an appropriate time scale.
Quantitative easing, appropriately directed to productive purposes in line with an agreed industrial strategy or policy, would provide the stimulus and capacity for investment that Zimbabwean industry (whose current net investment level is approximately nil) desperately needs.
But the demand for that investment finance is unlikely to materialise, for as long as industry remains as uncompetitive as it has been for a very long time now. The evidence for that loss of competitiveness, while resolutely ignored by our previous policymakers, is unmistakable — a perennial trade deficit that the country is experiencing, a shrinking share of world markets including our own domestic market, a manufacturing industry that is struggling even to survive, let alone prosper, and the constant lack of ability to balance our payments by borrowing from overseas anymore until we settle the current outstanding debt and selling our assets.
We hardly bother even to ask why this should be so. Yet the answers are staring us in the face. Zimbabwean industry would continue being uncompetitive in the region mostly because we insist on using the US dollar for our goods and services that become expensive compared to the weaker regionally preferred South African Rand for example. In the absence of a sovereign or domestic currency, Zimbabwe is a case of “no exchange rate”. Yet the most important determinant of international competitiveness is the exchange rate; it is the rate for our sovereign currency or domestic currency that should translate all our domestic costs into international prices. At the current situation of “no exchange rate”, what it means is that our locally produced products would continue to be priced out of the regional and international markets.
The foreign investors that have so far shown interest to come and invest in Zimbabwe have been largely motivated by the political changes that have occurred in the country and the positive disposition of the new leadership. While celebrating all these positive developments is well deserved for the country, it should be clearly understood that the issues of the country’s currency and liquidity situation are not only a political phenomenon but more of economic fundamentals.
Now that the Government has ruled out the adoption of the South African Rand as the official currency, the only feasible option is to introduce the country’s sovereign currency in order to facilitate the power of Government to stimulate much needed investment in greater productive capacity and full employment through new approaches to monetary policy which would facilitate and allow the manipulation of the exchange rate, not the current lame duck approach to monetary policy that the monetary authorities have been exercising since the adoption of the multi-currencies.
Money-creating power should be restored to the Government once again, with the banks acting as the Government’s agents. Credit creation should be targeted at increasing investment in productive industry, with the goal of increasing productivity, accelerating the rate of economic growth and providing full employment.
The policy of investment credit creation would directly benefit the economy because of the increased money made available for investment inproductive capacity and indirectly because the productive economy would be spared high interest rates and an overvalued currency.
Exchange rate plays a double edged sword role or function, to the potential investor out there, the exchange rate is the price or the cost of the investor’s unit of investment in the host country, while to the host or domestic country the exchange rate, through manipulation can be the host country or domestic country’s international price for its goods and services.
In conclusion, there has been excuses, which are correct anyway, that the economic fundamentals are not yet right for the introduction of domestic or sovereign currency in Zimbabwe. The question is, as we are on the other end ruling out the question of adopting the South African Rand as the official currency, for how long are we going to continue blaming the economic fundamentals for being not right and conducive?
The Government needs to work with vigilance and speed to get the economic fundamentals right and conducive for the re-introduction of the domestic currency for the good of the economy and the potential investors that are knocking the doors of our country from the east, the west, the north and the south, left, right and centre.
-Dr Bongani Ngwenya is based at the University of KwaZulu-Natal as a Post-doctoral Research Fellow and can be contacted on [email protected]
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