20 January 2019

Zimbabwe: 'Zim Must Urgently Solve Currency Crisis'

Zimbabwe needs to urgently address its currency crisis, which if left unchecked, will leave the country in a "monetary death spiral", economist Steve Hanke has said.

Local money which comprises bond notes and electronic balances (RTGS) which the government claims trades at par with the greenback have lost value significantly in recent weeks.

Adding to the currency woes, Zimbabwe is hard-pressed for liquidity as its main sources of foreign currency -- exports, diaspora remittances and foreign direct investment -- have been severely constrained creating massive foreign currency shortages in the market.

In an opinion piece published by American publication, Forbes, Hanke said bond notes and RTGS balance had been the major cause of the decay of the economy in recent years. He said President Emmerson Mnangagwa's mantra that Zimbabwe is "open for business" now rang hollow.

"Indeed, many businesses in Zimbabwe are broken. An increase in government-controlled fuel prices over the weekend has ignited simmering fury over what is in fact a currency crisis," Hanke said.

"What to do? As long as Zimbabwe continues to produce its own money, namely bond notes and RTGSs, Zimbabwe will continue to be in the grips of a monetary death spiral. Indeed, the new Zim dollars are malignant and must be removed. If left in the monetary system, Gresham's Law will continue to force US dollars out of the system to be put 'under the mattress', causing a huge artificial 'shortage' of US dollars".

He said government must announce that it will not rob the holders of bond notes and RTGSs.

"Remember that Gresham's Law, which was introduced by Henry Dunning Macleod in his Elements of Political Economy (1858) states that 'bad money drives out good.' Today, Gresham's Law is operating on steroids in Zimbabwe. Just how does one remove Zimbabwe's monetary malignancy before it kills the patient?

"They were issued at par to the US dollar, and they will be redeemed at par by the issuer: the Zimbabwean government. The redemption at par will take place over a five-year period. During this period, the government will redeem the bond notes and RTGSs by accepting them as payment for taxes or any other obligations."

He said if credible, the redemption policy announcement would cause the value of the bond notes and RTGSs to climb towards par, creating much needed liquidity, as well as solvency, in Zimbabwe's financial system.

"Zimbabwe's monetary death spiral will come to an abrupt stop. To run down the stock of new Zim dollars to 2016 levels, $1 billion per year should be redeemed over five years. Then, the patient will be deemed to be in remission, and a clean bill of monetary health can be issued.

Zimbabwe will once again have a healthy, superior currency, the US dollar," Hanke added.

"Zimbabweans realise that Mnangagwa is simply Mugabe (former president Robert Mugabe) in a new suit and with new rhetoric. The reality is one in which the economy is controlled by what in essence is an organised criminal syndicate: the Zimbabwe African National Union-Patriotic Front (Zanu PF) party -- the same syndicate that has run Zimbabwe into the ground for over 35 years."

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