Meaningful reforms must accompany slashing of zeros

By Lance Mambondiani

THE Zimbabwean financial market is not for the fainthearted. It is often said if you can do business in Zimbabwe, you can do business anywhere in the world.

Frequent policy shifts render business forecasting useless. On Wednesday, July 30, 2008, the Reserve Bank introduced a number of currency reforms intended to stabilise the Zimbabwe dollar and deal with perennial cash shortages due to an inordinate number of zeros in the payment system.

Gideon Gono, the governor of the central bank said: "The Zimbabwe dollar will be redenominated by a factor of one to 10, which means we are removing ten zeros from our monetary value. Ten billion Zimbabwe dollars today will be reduced to one dollar effective 1 August."

Although this move has been highly anticipated within business circles, it is the number of zeros removed which seems to grab all the headlines. Whilst reflecting the deep economic problems, Zimbabwe may again have scored a world first in its latest currency surgery. There are few, if any, cases of a country slashing ten zeros from a currency as a currency measure.

The crippling cash crisis in the country had made the slashing of zeros inevitable. Long queues have become a permanent feature in commercial banks; the RTGS payment system has been overloaded, with delays of up to a week in the processing of payments.

There are numerous explanations for the cash crisis, from the bank conspiracy theory to the monetary policy mismanagement theory. In basic terms, the persistent cash crisis reflects the problem with a hyperinflationary environment where economic agents demand more money for transactionary purposes. The cash crisis also reflects the extent of the Zimbabwean economy’s informalisation.

With most of the commodities available on the black market, consumers would prefer to keep their money out of the banking system in case they find scarce commodities where they need to pay for them in cash. Reports suggest that 90 percent of all economic activity is consummated in the black market. It’s not difficult to see how this can be the case.

The other explanation for the cash crisis is a general loss of confidence in the financial sector; negative real interest rates have meant that investors have no incentive to put their money in the formal banking sector, as there are no viable investment options.

The artificial withdrawal limits, previously set at Z$100 billion per day have also attracted widespread criticism. That amount is only sufficient to buy a box of matches. A loaf of bread now costs Z$200 billion whilst transport to and from work costs around Z$150 billion on average.

Recent reports suggest that the Zimbabwe Congress of Trade Union (ZCTU) had threatened unspecified action against the Reserve Bank of Zimbabwe (RBZ) if the central bank did not raise the daily cash withdrawal limit from banks. Whilst the low cash withdrawal limits were put in place to curb speculative activities, such ridiculously low withdrawal limits are equal to state sponsored theft and threaten the very survival of the banking sector. There is no economic justification for members of the public putting money in the banking system if they are not able to withdraw it.

Zimbabwe has not had a proper currency for sometime. Unless inflation is curbed, there is no economic logic in thinking of introducing one in the near future. Hyperinflation makes the replacement value of a new currency extremely prohibitive. The central bank’s plans to introduce a new currency last year were shelved after the strategy proved unsustainable.

Whilst base transactions suggest that transactions are edging towards dollarisation, the central bank is caught between a rock and a hard place. The inflation war seems more like an unwinnable battle, much like fighting against the insurgents in Iraq.

The payment system and the computing system of banks was now unable to handle the number of digits required for accounting purposes threatening transaction processing with total collapse. Reprogramming the computer systems to expand the size of fields required for the zeros would have required significant expenditure of foreign currency, which the country doesn’t have.

The introduction of higher denominated currencies or the slashing of zeros is dependent on the printing of new notes which has also become temporarily impossible due to the paper shortages.

The slashing of zeros or the intermittent increase in withdrawal limits cannot be the solution to solving the cash crisis. A long-lasting solution has to be found in the stabilisation of the economy through reducing inflation and the re-establishment of positive real interest rates.

The governor of the central bank is an interview with New Zimbabwe.com also highlighted the urgent need to resolve the political impasse for any meaningful economic regeneration to take place. Given that the amount of money held for transactions and precautionary purposes depends, among others, on the movements in prices, the current hyperinflation environment will soon render the new and higher cash withdrawal limit inadequate.

At the rate at which inflation is galloping even an adjustment of the withdrawal limits every month is unlikely to keep up with demand. The hyperinflationary environment coupled with low nominal investment rates has caused serious negative real investment rates. These negative returns on investment have significantly reduced banking habit as the resultant reduction in the opportunity cost of holding cash has given rise to significant speculative activities worsening the inflation situation through an increase in asset price inflation. Such financial dis-intermediation debilitates monetary policy effectiveness of banks in the central payment system.

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Previous attempts to rescue Zimbabwe’s stratospheric inflation have failed. In 2006, the central bank slashed three zeros from the currency when inflation then only stood at a few hundred percent. Inflation is now at 2,2 million percent although independent analysts put it at well over 5 million percent.

The recent currency reforms will certainly bring temporary relief to people in Zimbabwe. And if the power-sharing talks in Pretoria were to be successful, it may be the shock therapy that the country needs.

However, like the slashing of zeros in 2006, if unsupported by meaningful economic change, this latest move may well be just that – a fixation with zeros with no real consequence.

Lance Mambondiani is an Investment Executive at Coronation Financial Plc, an International Financial Advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at coronation.uk@btinternet.com. Please contact us should you wish to subscribe to our mailing list. You can also contact the Coronation team on; Business lines +44 161 346 9559 or mobile +44 790 3293 227.

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