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Banks against Zimdollar return

by Dumisani Nsingo
03 Aug 2014 at 20:37hrs | Views
THE Bankers Association of Zimbabwe (BAZ) says it is imperative for Government to retain the multi-currency trading regime to maintain price stability as well as to strengthen the banking sector for overall economic growth.

In a speech read on his behalf by Agribank's Divisional Director of Strategy, Marketing and Business Development, Mr Joseph Mverecha, at the Midlands Business Conference last Friday, BAZ president, Mr Sam Malaba, said dollarisation was typically difficult to reverse as the country's populace had lost trust in its local currency.

"The loss of trust in a currency is not an event; it is a process - often recurring macroeconomic instability, accompanied by high inflation rates and loss of a key function of money-store of value, hence undermining its viability as a medium of exchange. In many countries, macroeconomic instability is often preceded by political instability or occurring concurrently," he said.

The Government formally introduced the multi-currency regime on 29 January 2009, following two years of raging inflation that culminated in the hyperinflation episode of 2008.

Mr Malaba said the reversal of dollarisation was not easy (and could be very costly) even when the underlying causes (usually macro-economic instability) had been addressed citing that there was a need to have confidence in the economic policy following episodes of macro-economic instability, particularly characterised by hyperinflation.

"There are few cases where countries that had dollarised, succeeded in reversing dollarisation. The notable success cases are Israel, Poland, Mexico and Pakistan. In regard to the success stories, these countries implemented a broad range of macro-economic stabilisation measures, typically controlling inflation through inflation targeting and adopting specific measures to project increased local usage. Reversal of dollarisation or de-dollarisation came as a by-product or derivative of sustained good domestic economic policies which restored confidence in the economy, hence increased use of the domestic currency," he said.

Mr Malaba said the multi-currency succeeded in taming raging inflation and created conditions of price stability, though characterised by uneven relative price adjustments - prices of goods adjusted almost instantly, while prices of services and utilities remained high.

He said some service costs, however, remained as high as 25 percent above all other goods for the average consumption basket.

"So for Zimbabwe, the US dollar, which brought much needed price stability, has been the emblem of Zimbabwe's un-competitiveness - with no recourse to internal exchange rate adjustment through monetary policy. Accordingly, the only avenue for adjustment of the economy remains wage adjustment (specifically wage decline) or productivity gains.

"As productivity gains is a function of all other factors such as energy availability, plausibly, the economy's only avenue for adjustment is wage decline. But this is constrained by the current inflexible labour laws, hence the continuing quantity adjustment - protracted real Gross Domestic Product decline, as currently obtains," Mr Malaba said.

He said there were a number of misconceptions surrounding the multicurrency regime which were incorrect citing among them the thinking that the multi-currencies were contributing to the current liquidity crunch.

"The current liquidity challenges are due to the fact that Zimbabwe has limited or no access to international capital markets. This is due to the external debt overhang amounting to $8.9 billion and cumulative external debt payment arrears amounting to $4.9 billion," Mr Malaba said.

The BAZ president also said the multi-currency regime had no capacity to catalyse economic growth but could only succeed in bringing about price stability.

Mr Malaba said reverting to the local currency or rand would not improve liquidity or enhance monetary policy effectiveness.

"Capacity to print domestic currency is not synonymous with liquidity. The local currency must be accepted first by the public, before it can contribute to liquidity in the economy. It is noteworthy to remember that, in the last quarter of 2008 there was an overflow of local currency balances, due to printing and ‘burning' but this did not translate to more liquidity in the economy. A currency's acceptability by the public is critical for its proper functioning in the national payments system," he said.

Mr Malaba added that Zimbabwe could not access rand capital markets for funding due to overhang of external debt payment arrears.

"It is imperative that the Government retains the current multi-currency for the foreseeable future; in light of the need to maintain price stability as necessary to strengthen confidence in the banking sector for overall economic growth.

The public still retains residual fears regarding the early return of the local currency, following the experience of 2008. An early re-introduction of the local currency is certain to cause panic withdrawals of all US dollar deposits…," Mr Malaba said.

He also said concurrently, de-monetisation of the Zimbabwe dollar would go a long way towards re-establishing confidence in the banking sector, particularly if the process was implemented transparently.

"This must embed wide stakeholder consultations on the most optimal methodology for all stakeholders. The process of de-monetisation must not confer any special advantages to a particular group, nor disadvantage others. The public must have complete faith that the process is fair, even and transparent," Mr Malaba said.

Government through the Ministry Finance and Economic Development minister has said it would be ill-advised to re-introduce the Zimbabwe dollar now as the pre-conditions for the introduction of the local currency had not yet been met.

Source - Sunday News