On the complex reintroduction of the Zimbabwe dollar

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THE most important price in any nation is the price of its national currency in relation to other currencies. The main component in the successful reintroduction of the domestic currency in Zimbabwe is going to be a solid commitment by the Reserve Bank of Zimbabwe and the government in taking the crucial and necessary steps required to ensure that the new currency is going to be perceived as stable by the relevant stakeholders mainly industry, business, members of the public, the regional and international community.
The government, business and members of the general public need not avoid dialogue on the return of the Zimbabwe dollar into circulation. The revamping of the national currency is going to require sound macroeconomic policies, committed legislation in the financial sector, careful preparation and putting the right policies and processes in place. The revival of the Zimbabwe dollar is going to demand thorough planning with a detailed forecast which needs to include the cost of printing and minting the new cash currency. The final phase will be the production of the new currency and of course the all-important implementation.
The benefits of the multicurrency financial system have come at a cost for Zimbabwe. The case for or against the multicurrency system is contentious and complex and requires delicate handling and implementation. The Reserve Bank, in effect, lost its influence on the conduct of monetary policy. In as much as the multicurrency system has brought inflationary stability on the one hand, it has also eliminated the possibility of financing the fiscal deficit with seigniorage which compounds the current liquidity crisis because, without this possibility of public financing, the government will have to look for fallback sources of revenue. With the multicurrency system, the government has given up control of the money supply which regulates and restricts any stabilising response of fiscal policy to adverse extrinsic and intrinsic unpredictability.
Zimbabwe is currently facing a banking sector and liquidity crisis. The multicurrency system has imposed limitations on the Reserve Bank’s role as the lender of last resort to the banking sector which means local banks are already at a disadvantage and prone to internal and external shocks. Quantitative easing is a source for liquidity and, without a domestic currency, the Reserve Bank will have to look for alternative sources to respond to financial crises. The Zimbabwe economy has widely been opened to capital mobility, left vulnerable to shocks and government has its hands tied in terms of flexibility to respond to these shocks. The question to pose is – what can be done to address the emerging liquidity crises?  Dialogue on the return of the national currency is necessary.Advertisement

The country is facing huge fiscal deficits, deeper external imbalances and continuous capital flight. The current banking sector crises indicates an unstable demand for money which is impacting on the capacity of the Reserve Bank to conduct monetary policy. The banking sector is susceptible to high insolvency risk, higher deposit volatility and propensity to suffer sudden disruptions in capital flows and hence, recently, we have seen a number of banks closing down. There is a series of systemic banking crises in Zimbabwe with slower and more volatile output growth without any visible gains in terms of domestic financial depth. If the Reserve Bank had the role of lender of last resort it would be in a position to provide loans to crisis-hit banks facing liquidity problems.
The reintroduction of the Zimbabwe dollar, when it happens, is most likely going to be implemented amid tight macroeconomic conditions. It is important to note that the process of reintroducing the dollar is not going to address these macroeconomic difficulties immediately but gradually if supported by fiscal and monetary action. From a psychological point of view the return of the Zimbabwe dollar is likely going to facilitate the stabilisation of the economy. The key term here is likely. The reform process needs to be combined with exchange rate unification to eliminate the complications of both an official exchange rate and the black market rate.
The return of the Zimbabwe dollar needs to be supported by sound financial sector legislation to ensure consistency in international best practices. The Reserve Bank of Zimbabwe is the arm of the State that is responsible for reforming the domestic currency and thus reinforcing its capacity is critical. The Zimbabwe financial sector is currently bedevilled by liquidity issues and the Reserve Bank of Zimbabwe needs to assess the extent to which fake banknotes will be in circulation. The RBZ can work collaboratively with the ministry of finance and commercial banks to come up with a strategy to arrest any surge in the circulation of counterfeits during the crucial implementation phase of reintroducing the dollar.
Reforming the Zimbabwe dollar is going to be a painful and anxiety-provoking process, but necessary. It is a complex undertaking which requires a well-functioning accounting system. The process is going to require independent auditing to continually test the integrity of the currency revamp by ensuring accurate reporting and accounting of the currency exchange from the US dollar to the new Zimbabwe dollar. This is the phase in the return of the domestic currency where failure is not an option.
The public needs to be provided with accurate information and education on the necessity of reintroducing the local currency into circulation. The Reserve Bank of Zimbabwe needs to go on a charm offensive, not a defensive mode that will render the whole process a failure from inception. It could coordinate this public education strategy in collaboration with representatives from the country’s financial sector and members of the general public. The education and awareness campaign needs to encourage people to deposit their cash currency in accounts at banks. It is imperative that the public education campaign provides clarity for account holders that once the dollar is back in circulation they can withdraw their money in the form of new banknotes.
It is important that the RBZ provides the right information to the public on how the dollar is going to be injected back into circulation with as minimal disruption as possible. Panama is one country that went about reforming its currency, the Balboa, by tying it to the US dollar at a rate of 1:1 since 1903. The balboa coins are the same weight, dimensions, and metallic composition as the U.S coins. Of course Panama still uses the US dollar bills as legal tender and stopped printing its own paper bills at the end 1941. The point here is that reintroducing the Zimbabwe dollar is going to be a tall order and commitment from all stakeholders which requires sufficient preparation.
The public education campaign needs to start early; the Reserve Bank needs to carefully define and announce the terms of redenominating the new currency. This is the national currency and people need to be free to discuss the issue. The RBZ needs to initiate a robust awareness and education campaign. Leaflets and booklets illustrating the reintroduction process and the new banknotes need to be distributed and published in local and national papers along with clear explanatory notes to allay fears about this anxiety-provoking process.
The Reserve Bank of Zimbabwe could set up a hotline number to answer questions presented by all stakeholders and offer reassurances to businesses and members of the public. The practical aspects of reintroducing the local currency are equally important and the RBZ can decide to use the same banknote printer and coin minter as pre-multicurrency. However, care needs to be taken to provide security against counterfeiters. The decision about the artistic design of the banknotes is critical psychologically.
Thus the crucial initial step in reintroducing the Zimbabwe dollar is the unification of the exchange rate. During the hyperinflationary period and the critical shortage of foreign currency, the period leading to the 2008 general election, a dual exchange rate system prevailed with the official exchange rate and an informal parallel black market exchange rate. The starting point is to devalue the official exchange rate to a commercial rate at which banks can freely trade with the public with the intended outcome being full unification in due course.
The RBZ can set currency exchanges at convenient locations to provide easy access and official access at rates close to the shadow exchange rate to kill off demand for the black market. The government will have to issue new foreign exchange regulations under which the Reserve Bank of Zimbabwe can begin providing banks and formal channel currency changers with access to foreign exchange which means that provision of sufficient foreign exchange across the country will help in eliminating the black market.
The Reserve Bank of Zimbabwe will need to involve stakeholders in the design and denominations and once these are in place a decision can be made on how much to produce taking into account the demand for money in general. Currency exchange is crucial to finalising the reintroduction of the Zimbabwe dollar. The Finance Ministry and the RBZ will make the final decision as to when it will begin and when it will end. All stakeholders need to be consulted extensively.
Bernard Bwoni can be contacted at