Benefits of RBZ currency reforms immediate, but not long term

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By Gilbert Muponda

ON July 30, 2008, the Reserve Bank of Zimbabwe (RBZ) released the Mid-Term Monetary Policy which included currency reforms.

Whilst the statement had several positive policy shifts, the economy is unlikely to improve due to the unresolved political crisis arising from the contentious March 29 general elections and the run-off presidential poll on June 27.

In the absence of an undisputed political settlement, Zimbabwe will remain with the crisis of confidence and as such investment, production and international support will remain at undesirably low levels.

The currency reforms are welcome in as far as they address the strain on IT systems and the general burden to the public of travelling with huge amounts of currency even for simple shopping trips. The public will obviously be relieved that instead of carrying suitcases to go shopping, now a wallet can in fact do the trick.

Banks, which had now been forced to develop various sub-accounts for clients, will now have to re-adjust to normal practices. These are the immediate and likely only benefits.

The Zimbabwe dollar will, however, remain weak and under speculative pressure due to the depleted (non-existent) foreign currency reserves. In addition, the inflation differential between Zimbabwe and its major trading partners is so high that the Zimbabwe dollar cannot sustain its newly acquired value for any foreseeable future.

The Global inflation forecast is approximately 4.8% for 2008. And Zimbabwe’s current inflation is 2.2 million % and forecasts indicate it could easily hit 100 million % before year end. The Zimbabwe dollar is, therefore, likely to depreciate by a margin that mirrors the inflation differential between Zimbabwe’s inflation and that of its trading partners and that difference is running into millions.

The removal of zeroes would have been a perfect measure if supported by significant balance of payment support from various sources including IMF, Africa Development Bank, PTA Bank and the wider international community.

In addition, other measures would be required such as building import cover for six to 18 months. The lack of import cover means the nation’s reserves are basically operating on a hand to mouth basis and as such, the currency cannot stabilise just by the removal of zeroes.

The currency reforms in the absence of a political settlement which is required for Zimbabwe to be re-admitted into the global financial system means the measure would be a wasted effort in as far as stabilising the currency and inflation. The political settlement is key in that the various targeted sanctions that have been announced are now going beyond individuals and the latest addition included various listed corporates and numerous parastatals.

The effect of this is to limit the counterparties these entities can trade with and will in the long run entangle most companies listed on the Zimbabwe Stock Exchange. This will further worsen capital flight and dampen one of the few viable investment destinations that remain for most Zimbabweans.

The other side is some of the targeted sanctions come with a stick and carrot approach and upon being lifted, Zimbabwe will qualify for various specific programmes to help rebuild the economy.

The Mid-Term Monetary Policy mentioned the need to invite private sector participation in various parastatals. This is a positive measure but needs to go further and in fact pursue an aggressive privatisation programme which will free State resources only to those areas in which the private sector has no capacity.

It is clear most of the recent quasi-fiscal activities have been necessitated by the need to keep parastatals on their feet. This can be avoided by privatising most of these institutions many of which have ready buyers and at attractive prices should this be accompanied by a political settlement.

In the absence of a political settlement, privatisation may not realise optimal values as assets are likely to remain depressed due to political uncertainty. Zimbabwe has attractive assets in mining, telecommunications; transport, food processing and these assets could be disposed of in foreign currency and help build stable import cover capacity. Simulteously, the disposal will save the public purse from the now routine rescue missions of RBZ hand outs to the parastatals.

In addition to export incentives, the authorities need a clear plan to encourage Non-Resident remittals to come through the official systems. Many nations including Mexico, Cuba, India, Pakistan, Philippines, and Nigeria have developed channels and institutions to help and encourage their non-resident citizens to remit more funds back home. This needs to be a genuine effort which is normally accompanied by the right of these non-resident citizens being allowed to vote. This is critical to build a sense of nationhood and nation building, after all remittals with no right to vote is similar taxation without representation.

Gilbert Muponda is a Zimbabwe-born entrepreneur. This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com

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