17 April 2014

Zimbabwe: Continued Zim Dollar Rumours Hurt Economy

Photo: Antony Kaminju/IRIN
A woman sells vegetables at a food market in Harare.

analysis

LAST week this column observed that, notwithstanding the multitude of scarcities and shortages afflicting Zimbabwe, the country has some surpluses, of which poverty continues to be one of the greatest of the few surpluses.

However, one of the other surpluses is that of unfounded, highly damaging rumours.

Zimbabweans have been afflicted by negative economic circumstances for over 16 years which include recurrent scarcities of essential medication and equipment in state hospitals and clinics; textbooks, and other educational aids needed in government schools, and intermittent availability of utilities and other services.

Consequently if they hear a rumour which is positive in nature they dismiss it.

On the other hand, if the rumour is negative, it is immediately considered to be based on facts, and is conveyed to others so that they become aware of the unfavourable circumstances.

Of the many rumours devoid of substance but which are perceived to be factual one of the most frequently repeated since 2009 is that reversion from the current multi-currency system to a national currency is imminent.

Over the last five years that rumour has surfaced many times, the first time within four months of the demonetisation of the Zimbabwe dollar and the adoption of the multi-currency system. Despite that on each occasion the rumour has been proven untrue with the multi-currency system remaining in force and the Zimbabwean dollar remaining demonetised, the rumour has resurfaced again and again.

Every time the rumour has made the rounds the negative repercussions have been considerable. Some of those with funds in banks and financial institutions immediately withdrew their funds, be they US dollars, South African rands, Botswana pula, British pounds, euros or otherwise.

They did so due to intense fears that, simultaneously with a reintroduction of a national currency, their foreign currencies in the banks and financial institutions would immediately be expropriated by government or the Reserve Bank, with compensation being effected in Zimbabwean dollars at the exchange rate which prevailed when demonetisation occurred.

As a result, the money market was immediately subjected to immense illiquidity.

That precluded vital lendings to commerce, industry and other economic sectors, and triggered substantial increases in interest rates and bank charges.

Concurrently, past expectations of reversion to a national currency fuelled increased operations of black market trading in foreign currencies, with a special emphasis upon sales of foreign currencies held abroad by some Zimbabweans as many became anxious to have foreign currency holdings outside Zimbabwe's borders.

This had the effect of diminishing the highly inadequate foreign currency resources in Zimbabwe, thereby further weakening the economy, including fuelling inflation.

Moreover, the currency rumours and attendant economic instability and uncertainties became major deterrents to crucial investment into the economy.

Potential foreign investors feared for the security of any investments they made, and in particular that any investment earnings or subsequent proceeds of disposal of the investments would only be repatriated to them in Zimbabwean dollars.

Concurrently they, and the few potential domestic investors, feared demonetisation of a national currency would trigger an immense economic decline that would render their investments worthless.

Recently, the rumour of the restoration of the national currency has reared its ugly head yet again. Initially it was fuelled by a statement in February by President Robert Mugabe that Zimbabwe will revert to its own currency.

However, although he said that, it was disregarded that on the one hand he said that such reversion should be concurrent with an adequacy of reserves to support the currency, and on the other hand he in no manner intimated when that would be.

However, the negative - thinking populace immediately assumed that the return of the Zimbabwean dollar was imminent.

The rumour machine was also fuelled when certain officials of the RBZ reputedly disclosed that the RBZ had printed new Zimbabwean dollar banknotes (including Z$10 millions notes) last October and November.

That probably, though not confirmed, is factually correct, but at that time government was very anxious to re-establish the national currency as rapidly as possible. However, the populace disregards two very relevant and important subsequent developments.

After such printing of banknotes, Zimbabwe hosted a team from the International Monetary Fund (IMF) assisting government formulate an effective economic recovery and development and growth programme.

Whilst they were so engaged, it was reported government and the IMF team were agreed that a national currency should only be created, if ever, when such currency would be fully supported by meaningful reserves.

They stated that there was agreement as to the basis of evaluation of the reserves, and that it was anticipated such reserves would not suffice before, at earliest, 2016.

Similarly, the rumour-mongering populace has completely ignored the statement by Minister of Finance Patrick Chinamasa in his budget statement in February that Zimbabwe will not return to its own currency until it has a sufficiency of reserves to support the currency, which would at best be in 2016 and possibly later.

There was also disregard for Acting RBZ Governor Charity Dhliwayo adding two further foreign currencies to the multi-currency regime when she presented her Monetary Policy Statement. Surely she would not have done so if a return to national currency was imminent?

All these factors are indicative of the fact that the latest flood of rumours are probably devoid of foundation, for if they are well-founded, the economic consequences would be disastrous.

Nevertheless, despite the rumours being unfounded, many believe them to the detriment of the economy.

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