Many are calling him President Mnangagwa’s best appointment. That’s new the Finance Minister Mthuli Ncube, a technocrat as many of us are saying. He starts his reign as the Minister of Finance in the back of a struggling economy. Shortage of bond cash, shortage of foreign currency cash, increasing prices etc are some of the visible problems that are taking a toll on the economy.
Speaking of currencies, Professor Ncube has now disclosed the kind of currency reforms that he is considering to introduce by year end. And whether we like it or not, his solutions are undoubtedly polarising. Here are the currency, according to the Sunday Mail;
“Adopt the US dollar only and remove the bond notes from circulation through a demonetization process and also liberalize exchange controls”
I believe, this is undoubtedly the most popular solution for many people primarily because of the introduction of the world’s most valuable currency and the chucking of the controversial bond currency. The US Dollar is viewed as a hard currency (it is not likely to greatly fluctuate in value.)
With this feature in mind, adopting the US dollar can help to stabilize the economy, aid recovery and promote trust to attract foreign investment. Countries like Vietnam or Ecuador which have dollarized, have done so primarily to achieve stability by keeping the inflation down, courtesy of the USD. Dollarisation is the use of a foreign currency in parallel to or instead of the domestic currency.
For individuals, especially those who have an affinity to buy outside Zimbabwe, you will be able to buy more stuff when the US Dollars are converted to the local currency of a respective country. Or for those who have deep pockets, taking a vacation in South Africa will be affordable when you convert your US dollars to the Rand.
For companies that import, they will buy more goods/raw materials for a few converted US dollars. Inversely companies that export will be hurt with dollarization as their products will not be competitively priced in other countries.
“Two, adopt the rand by negotiating to join the Rand Monetary Area, and this will close the gap in loss of competitiveness against our largest trading partner, South Africa.”
By adopting Rand, Zimbabwe would effectively join what’s called the Rand Monetary Area, also known as the Common Monetary Area. The Common Monetary Area (CMA) is a monetary union of South Africa, Namibia, Lesotho, and Swaziland. And its system under South Africa’s hegemony.
In the past five decades, the CMA has worked to the economic benefit and stability of these four countries. Thus, the selling point of this system is stability that is emitted by South Africa.
Whilst CMA members have their own central banks and some even have their currencies, the problem with it should Zimbabwe join is that Zimbabwe won’t have that freedom to unilaterally implement its monetary policy to affect its economic health.
“Three, adopt a new Zim Dollar, and here one needs to be clear that it has to be backed by adequate foreign reserves and macroeconomic conditions for its stability”
Here is one solution that will find very few cheerleaders. The tale of the Zim dollar didn’t end very well, with many people losing their savings, pensions, properties, assets after it was abandoned a decade ago. Just the word ‘Zim Dollar’ itself, it sends chills down some people’s spines. In light of this, the re-introduction of the Zim Dollar will evaporate what confidence is still there and consequently destabilize the economy. However, if the Zim dollar is reintroduced, the government will regain its power to influence economic activity through monetary policy.
Whatever Professor Ncube picks as his solution to revive our dying economy, it should be noted that the effect of his picked solution will hinge on the political backing that he will have to implement.
If I were to pick one reform, I would go for the CMA option simply because it strikes a balance between feasibility and reviving credibility in our economic system. Adopting the USD is a fine reform in many respects but I hardly think its feasible because I’m not sure where the US dollars would come from. Would America bankroll us? I hardly think so. Most of the US dollars or foreign currency that’s coming in Zimbabwe is coming from remittances and nongovernmental organizations. Whilst US dollars from these avenues have kept Zimbabwe afloat for some time, it won’t be adequate (the quantity of US dollars in the economy) to have as the country’s sole currency.
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Professor Mthuli Ncube is the Minister of Finance and Economic Development.He was the Chief Economist and Vice President of the African Development Bank ,financial, economics, investment, and public policy expert, entrepreneur and academic. Professor Ncube divides his time between the private sector in Switzerland and... Read More About Mthuli Ncube
Bond Notes are a currency of notes backed by a bond that the Zimbabwe government announced on 4 May 2016 by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya. The $2 denomination of the notes was finally introduced on 28 November 2016. More notes were... Read More About Bond Notes
The Sunday Mail is a state owned weekly newspaper publication which is popular in Zimbabwe. The paper operates under the Zimpapers brand. The Sunday Mail was first published in 1935 during the colonial period in the then Rhodesia and it operates from the Zimpapers offices... Read More About The Sunday Mail