(HARARE)RESERVE Bank of Zimbabwe Governor DR GIDEON GONO, in this article attends to questions raised against him on reintroducing the Zimbabwe dollar and what he defines as ‘challenges stakeholders to contribute to the debate.’ This article comes in the wake of the debate triggered by the proposal he made to reintroduce the local currency when he appeared before the Parliamentary Portfolio Committee on Natural Resources, Hospitality and Tourism on Monday.
1. INTRODUCTION AND BACKGROUND
1.1 Stakeholders would agree that whilst Zimbabwe has managed to stabilise the hyperinflationary pressures that characterised 2008, the country has relapsed into a serious demand deficiency loop that is threatening to choke the productive sectors across the board, and in the process worsen and perpetuate the savings, investment and tax revenue deficiencies.
1.2 Put metaphorically, and in biological terms, if 2008 was an era when the economy was overheating through too much blood pressure, in 2009, the economy is suffering from a cataclysmic scenario of too low levels of blood pressure where some parts of the body are not getting even a drop of blood due to the highly constrained internal circulation of the precious liquid.
1.3 This scenario is not sustainable, particularly in respect of the majority of Zimbabweans in the rural areas who now have no means to pay for school fees, bus fares to hospitals, buy medical drugs, buy coffins to bury the departed loved ones, let alone ferrying their crops around in search of the scarce effective markets for their hard earned agricultural produce.
1.4 Industrialists too are on the brink of relapsing into the downward spiral due to the severe demand deficiency syndrome now dangerously characterising the country’s goods and services markets.
1.5 To the searching mind, it is not difficult to identify the following contributors to this unfortunate turn of events.
THE CAUSES …
(a) As a country we had pinned our hopes on vibrant financial liquidity being injected by outsiders. This has not yet happened. This is an unfortunate and painful fact;
(b) Some among ourselves celebrated “the death” of the Zimbabwe dollar. This death was ululated and replaced by foreign currencies whose quantitative and denominational supply side we cannot influence.
The result is that even in the face of genuine, progressive demand for money, to support industry and commerce, nothing can be done, but to simply watch as products go to waste or gather dust without meaningful demand for them; and
(c) As a country, we have not as yet meaningfully reorganised our efficiency levels in the public utilities sectors and general exploitation of our natural resources, such that the internal emission of wealth-backed liquidity has remained precariously subdued.
1.6 The principal lessons that are apparent from this status-quo are:
(a) That whereas it is true that too much money chasing too few goods contributes to inflation, it is equally true that too little money chasing many goods and services is hazardous to the economy and hence hazardous to the welfare of the people;
(b) That Money Supply alone is not the sole cause of inflation.
In my Doctoral Studies, I was able to demonstrate how the psychological variable of adverse and speculative expectations, as well as structural rigidities in the economy’s supply chain are equally culpable in generating inflation bubbles in the economy; and
(c) That as a country, we should not entirely pin our hopes on mystified Messiahs from elsewhere beyond our borders, but instead focus on redeeming our situation through productive deployment of our own resources, supported by the stretch mode of “thinking outside the box” so to speak.
1.7 In the face of the above lessons, it is mind-boggling to realise that the past few weeks and days have been characterised by spirited attacks on the Governor of the Central Bank for allegedly “being out of touch with the wishes of the People by calling for the reintroduction of the Zimbabwe dollar”.
(Graphic: Asset based issuance of local currency)
1.8 Some such attacks gave juicy and heroic commendations to the Herald newspaper for “finally seeing the light by opposing/attacking the Governor”.
1.9 These attacks were, however, anchored on what is most likely either total ignorance about the intricate technicalities at hand on the part of the sponsors of those articles or simply a deliberate attempt to perpetuate what is now quite clearly a breed of internally generated or self-imposed sanctions on ourselves through the obnoxious effects of the liquidity crunch.
1.10 I speak about these two possibilities given the failure by these critics to pay attention to or at least make honest reference to what I said in the 2009 Mid-Year Monetary Policy Statement.
WHAT THE BANK SAID ON THE REINTRODUCTION OF THE ZIMBABWE DOLLAR
QUOTE: (The 2009 Mid-Year Monetary Policy Statement, 30 July, 2009, Page 5)
1.11 “Considerable debate is currently raging on the fate of the Zimbabwe dollar in future, as well as in respect of Zimbabwe dollar balances that were caught up in the multiple currency transition period.
1.12 As Monetary Authorities, our views and advice on this matter are anchored on the following 2 key principles:
(a) That the existence and stability of a country’s national currency is defined and dictated by the barometer of real economic activity in the economy.
Accordingly, therefore, in as much as the loss of value of the Zimbabwe dollar was a direct result of the near absolute stagnation in Zimbabwe’s entire productive systems, a quicker recovery and sustained growth in the productive sectors of the economy will lay a solid foundation for the return of the Zimbabwe dollar and this can be anytime depending on how seriously we work as a Nation to rebuild our economy. (See emphasis on need for productivity).
To this end therefore, there are no calendar time limits favouring or barring the return of the Zimbabwe dollar, and as Monetary Authorities, we will continue to carefully gauge the overall performance of the economy to inform us on the appropriate decisions or courses of actions to take, in close collaboration with our Principals in the Inclusive Government; and
(b) Our strong views and preference however, are that as Zimbabweans we must have our own currency and autonomy in formulating our fiscal and monetary policies
Whilst too much demand relative to supply has traditionally been pointed out as the mother of inflation and its noxious spill-over effects to society and the economy, too little demand can itself be an equally deleterious vampire that can bring down the economy amidst plenty in stockpiles and flooded stockrooms full of goods facing little or no demand.
1.13 Future policies on the currency issues will, therefore, stand guided by an intimate consideration of the progress we make on key milestones on the production front and the need to minimise the downside risks of a protracted recession.” (End of quote).
1.14 The nucleus of the above message, which seems to have been missed by the self-proclaimed “experts” was that:
(a) The Bank’s explicit recognition that the strength of any currency is derived from and defined by the nature and depth of tangible production activities on the ground; and
(b) That the reintroduction of the Zimbabwe dollar is feasible to the extent this is anchored on underlying real assets or actual production on the ground.
PROPERTIES OF AND FUNCTIONS OF MONEY
1.15 Given the importance of the subject matter at hand, it has become necessary that as Stakeholders we openly elevate our deliberations on the currency issue to the necessary technical levels that lay bare the imperatives, whilst at the same time informing and educating those who could be making seemingly elegant but faulty pronouncements on matters they are the least competent in.
1.16 The debate on the reintroduction of the Zimbabwe dollar must primarily be anchored on the empirical reality that at the present moment, particularly when one applies this debate in the context of evaluating progress made under the Inclusive Government’s 100-Day Programme, Zimbabwe is faced with a devastating demand recession.
1.17 What this means is that whilst it is true that by definition, money has more than one desirable characteristic and function, the most prominent feature of relevance by order of degree in Zimbabwe at the moment is that our markets need a viable medium of exchange in sufficient quantities to oil the needs of companies and households.
1.18 I am fully aware that the other functions of money such as its function as a unit of account, as a standard for deferred payment; and as a store of value are very important for any currency, but the medium of exchange axis is the most dominant one in the context of the severe demand deficiency the country is suffering from NOW.
WHAT I AM NOT SAYING
1.19 It is also critical that stakeholders get it clearly that what this Governor is calling for is not a blind return to the money printing press and then say to the market “to hell with other currencies, here are new Zimbabwe dollars”. No, this is not what I am advocating for.
1.20 Rather, what I am calling for is the guarded reintroduction of the Zimbabwe dollar where such new currency will be fully backed by credible, tangible and locally available assets, such as gold, diamond or platinum, among several other possibilities.
1.21 The benefits of supporting the new currency with our own internally produced resources are that:
(a) Such a new currency will have real, tangible worth as embalmed in the real asset(s) backing it. This gives the new currency the characteristic of General Acceptability as a fluent medium of exchange in goods and services markets;
(b) Given the country’s already proven reserves of gold, platinum and diamonds, among several other minerals, a fully backed currency which can freely convert back to the real underlying assets at the instance of the currency holder’s wishes will have the desirable characteristic of being a legitimate store of value. In other words, the currency will have a stable value over time given the direct link to the volume of tangible assets from the real sector;
(c) Being locally produced, the asset-backed currency can be issued in denominations that the market needs. This gives the currency the desirable feature of smooth divisibility absence of which is seriously leading to change problems and punitive rounding up of shop-shelf prices at the moment;
(d) Introduction of an asset-backed currency would not only bring back pride and a sense of sovereignty in our financial affairs, but would also dismantle what now seems to be internal sanctions whether by design or by inadvertent default;
1.22 To be able to fully understand the mechanics of what I am putting forward, it is very instructive to make reference to the historical Gold Standard under which gold was the linchpin of commercial transactions and the underlying asset backing fiduciary global currencies.
THE GOLD STANDARD
1.23 The gold standard is a monetary system in which money in circulation is freely and fully convertible into a fixed amount of gold. Under such an arrangement, the value of local currency is fully backed by gold. The system allows holders of local currency to redeem paper money for gold at a specified rate.
1.24 The total amount of money in the country would be fixed in relation to the amount of monetary gold. The Central Bank is only able to expand money supply if there is a corresponding increase in gold reserves.
1.25 The gold standard, which is characterised by stable exchange rates removes business uncertainties and facilitates trade and commerce.
THE CURRENCY BOARD
1.26 Under a Currency Board arrangement, Monetary Authorities only issue domestic currency, backed by foreign exchange reserves. The
l To Page 13
In defence of reintroduction of Zim dollar
l From Page 9
Central Bank issues notes and coins that are convertible into the anchor currency at a fixed rate of exchange.
1.27 Under a Currency Board, however, the country loses monetary autonomy to the anchor country.
OPERATIONAL MODALITIES OF ISSUING THE GOLD/DIAMOND BACKED LOCAL CURRENCY
1.28 Under the gold/diamond backed monetary system, Government will need to provide adequate mineral resources to back each unit of the local currency issued.
1.29 It will be critical to capacitate local gold and diamond producers in order to produce adequate mineral resources.
1.30 Government will establish an Independent Committee of Stakeholders to ascertain and certify the quantity of gold or diamonds produced to back the issuance of the local currency. This Committee would, thus produce certificates of authenticity, indicating the true levels of gold, diamonds, platinum, against which now money would be printed.
1.31 The operational modalities of the gold/diamond backed local currency issuance are as follows:
1.32 Diamond/Gold producers deliver to the designated delivery point
1.33 An all inclusive Independent Panel of stakeholders certifies the quantity of gold/diamonds produced and delivered.
1.34 Upon delivery of gold/diamonds the Independent Panel of experts issues gold/diamond certificates to RBZ, authorizing it to issue local currency equivalent in value to the amount of gold/diamond delivered.
1.35 RBZ instructs Fidelity Printers to print local currency equivalent to the value of the gold/diamond certificates and reports back to the Panel for verification and transparency,.
1.36 Fidelity Printers prints local currency amount equivalent to the value of gold/diamond delivered.
1.37 RBZ issues local currency to the Public through the Banking channels.
1.38 The result would be smooth functionality in the country’s payments system, without the risk of over supply of money.
1.39 The re-introduction of local currency, backed by gold and diamond requires huge investment in the mining sector to produce adequate mineral reserves to back economic activity. The country’s mine houses should, therefore, be adequately resourced.
1.40 The following supportive measures should also be taken:
i. Further fiscal consolidation;
ii. Trade and capital account liberalization;
iii. Further liberalization of the foreign currency market;
iv. Strengthening of Institutional credibility; and
v. Rebuilding of high foreign exchange reserves.
1.41 As a country, it is very important that we carefully weigh the costs and benefits of developing alien policy prescriptions that fail to recognize the reality that at the present moment Zimbabwe is under sanctions and with very minimal external help.
1.42 For the economy to meaningfully recover, there is urgent need to reactivate aggregate demand in the economy.
1.43 Fears that reintroduction of the Zimbabwe dollar backed by gold/diamonds/ platinum would rekindle inflationary pressures are not justifiable given that under the proposed scheme, the local currency to be printed would be limited to the quantum and value of actual gold/diamonds/platinum in stock.
1.44 As Zimbabweans, we must face facts and recognize that nowhere in the world does one have a country other than Zimbabwe where miners dig ore from the ground and have virtually 100% entitlement to “ship their money out “without a notable component going into Government coffers”.
1.45 This begs the following question: “Are those setting our policies oblivious of the realities obtaining elsewhere in the world or are they deliberately punishing all Zimbabweans for some perceived crime?”.
1.46 The bottom line of my proposal is, therefore, that Zimbabwe should strategically leverage on its natural heritage to resolve the current economic crisis.
1.47 Simply relying on multiple conferences, endless strategic workshops or pledges from the outside world will not do.
1.48 We should take pride in ourselves as a Nation that indeed, the interventions we did in the agricultural sector, albeit in the face of clouds of criticism by some “experts” did pay off.
1.49 The 2008/2009 season saw the country registering a bumper harvest of around 1.2 million tones of maize, itself an achievement recognized by friends and foes of Zimbabwe.
1.50 Through relentless creativity in other spheres of our social, political and economic existence, we will sure deliver the Zimbabwe that we want.
1.51 What I have done here is to simply plant modest raw ideas for constructive debate to take place in the spirit of supporting our economy.
1.52 As is typically the case with most pioneering work, the pioneers themselves are usually ridiculed, whilst downstream end-users of the created ideas stand to benefit as true heroes.
1.53 As the Central Bank, we will do our part to support efforts within the perimeters as set out by the statutes that govern our core operations.
DR. G. GONO
20 August, 2009