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Zimbabwe’s new currency masks need for a political fix

By David Whitehouse
Posted on Wednesday, 27 February 2019 12:07, updated on Friday, 8 March 2019 18:25

Zimbabweans compare the new note with the US dollar note following the introduction of new notes by the Reserve Bank of Zimbabwe in Harare, Monday, Nov, 28, 2016. Tsvangirayi Mukwazhi/AP/SIPA

The new currency does not hide the fact that until the politics is sorted out, Zimbabwe's economic situation remains paralysed

Zimbabwe’s recognition of the fiction of the parity between its bond notes and the US dollar has been broadly welcomed.

Central bank governor John Mangudya argues that the RTGS dollar – named after the country’s interbank online payment platform, Real Time Gross Settlement – will promote exports, diaspora remittances and foreign investment.

The central bank is establishing an interbank foreign-exchange market in which the new unit will be traded. But critics say that without a political fix, any economic reforms are just buying time.

  • Invictus Securities argued in a note on 21 February that in the absence of adequate foreign currency reserves and meaningful foreign direct investment, the RTGS dollars will always be under pressure against the US dollar.

Hard budget constraint needed: Steve Hanke, professor of applied economics at the Johns Hopkins University in Baltimore, argues that the hyperinflation in 2017 triggered the downfall of former president Robert Mugabe.

According to Hanke, the RTGS “will never work”. Zimbabwe’s “economic death spiral” can only be ended by the creation of a hard budget constraint through outright dollarization. This should be done over a five-year period, he says.

Botswana has offered to lend Zimbabwe $600m to support its diamond industry, according to Reuters. Hanke doesn’t think it will help. “It’s hard to borrow your way to prosperity unless you have a productive plan,” he says. The money is likely to “go down a rat hole.”

  • The budget can’t be controlled without dollarization, with over 80% of the budget being consumed by spending on the civil service, Hanke says. The first priority should be fixing the deficit. “The sequencing is wrong.”
  • Hanke is confident that a dollarized Zimbabwe would be able to earn enough foreign currency to function and service its debts. “There is no country that hasn’t been more productive after dollarization. Dollarization has never failed. Period.”

However, Hanke sees no signs of the political will in Zimbabwe needed to implement dollarization. The Zimbabwe government and central bank are “technically incompetent” he says. “They haven’t thought it through.”

Dollar shortage: Piers Pigou, senior consultant, southern Africa with Crisis Group in Johannesburg, says that it is too early to know if the RTGS move will succeed. Pigou, last in Zimbabwe in December, argues that full dollarization would come at too high a price.

“People are completely dependent on ‘fake money’. Everyone would lose everything,” he says. The currency reform may work in the short term as a form of stabilization, but will not fix fundamental problems, Pigou says.

  • Zimbabwe, Pigou argues, already has a massive demand for dollars to pay for imports and service debt.
  • The country has a huge trade deficit and is struggling to pay for wheat imports, he notes.
  • Zimbabwe “is not producing enough to bring in enough dollars.”
  • The weight of domestic debt will have serious implications for financial institutions that have bought Zimbabwean T-bills, Pigou says.

Transparency International‘s Corruption Perception Index for 2018 puts Zimbabwe at 160 out of 180 countries surveyed. “Transparency is more important than money supply, Pigou says. “Whatever they do is shrouded in opacity.”

  • “Zimbabwe faces toxic political challenges,” he argues. “There is no transparency in terms of political economy, in terms of who owns what. Money supply tinkering does not address the political challenges. There is no sanitized economic solution.”

There have been some signs of progress. The administration has given a template against which to measure progress, Pigou says. More information has been made available than before, for example on domestic and foreign debt levels. But the data presented raise questions about the reliability of the inputs that are being used, he says.

Bottom line: Zimbabwe may find that transparency and openness are more important that the monetary instruments used as it seeks to engage with international lenders.

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