COMMENT (Zimbabwe Investor) – This week Zimbabwe’s central bank presented the country’s first monetary statement of the year 2014 and the first one since the departure of the controversial governor for ten years Gideon Gono. The country which had been accustomed to theatrical monetary statement ceremonies during the tenure of Gideon Gono especially prior to the inclusive government era was treated to a short, direct and no-nonsense presentation by the acting governor Charity Dhliwayo.
The acting governor’s first monetary statement has a number of positive measures which include; pushing back the implementation of the US$100 million minimum capital requirement for banks to 2020, clamping down on insider loans which have caused many banks to fail, pushing for re-establishment of credit reference bureaus and the simplification of account opening procedures to capture a larger unbanked market among others.
The headlines across local and international media have however focused on the country’s expansion of its multi-currency regime to include major Asian currencies and the Australian dollar in the basket. The debate has to move from the impracticality of such an arrangement to the opportunities available from the use of nine different international currencies.
While the headlines, for obvious reasons, sought to deride this expanded multi-currency measure, there could be real economic benefits for a country without its own currency soothing that has been restricting the central bank in its ability to perform the lender of last resort function.
Firstly, to benefit from the extended basket of currencies, the country must implement economic measures that are focused on developing the real industry to give it capacity to export meaningful volumes competitively. The country could use the expanded basket of currencies to its advantage by developing its export industry to take advantage of an environment with almost zero exchange currency risk. A company exporting to South Africa no longer has to worry about the movement of the Rand against other currencies as it can simply buy or sell the currency which has moved the most in equivalent amounts to hedge its receipts whenever they will be realised.
What is required parallel to the export oriented economic measures in light of the currency regime is a financial system which is adept at providing the intermediary service to the economy. Zimbabwe’s financial industry has often suffered from insisting that economic activity be aligned to its long standing “tried and tested” business model instead of adapting to prevailing conditions to exploit opportunities arising. Zimbabwe’s banking leadership through the Bankers Association of Zimbabwe must get together and develop a robust currency exchange system that ensures everyone, from the airtime vendor to platinum miner, has an opportunity to access fair dealing in their transactions whichever currency they hold. There is a big business opportunity for the country liquidity hamstrung banking sector.
A more localised benefit of the new currencies in the basket is that the difference between the stronger currencies, the Pound Sterling and US Dollar, and the weaker Indian Rupee and Japanese Yen present an opportunity for the central bank to play a role which is close to the one it plays if it had capacity to print or mint new money. One US dollar trades at around 100 Japanese Yen. The Reserve Bank of Zimbabwe is in a position to take deliberate steps of buying and injecting that weaker currency into the market to improve liquidity. It can also control supply by buying back as and when it sees prudent. The Japanese Yen will then be used to represent US cents for the purpose of transactions. The role of the local banks would be to cushion local traders from volatile movement between the US dollar and the Yen on the international markets by taking appropriate forward currency positions.
Of course this could prove cumbersome especially in areas of the population with low literacy and numeracy abilities. There will always be that unscrupulous dealer who will attempt to make a “quick buck” at the expense of that part of the population particularly in the rural area. The authorities can implement mitigatory measures starting with educating people in the simplest language and media.
The transactional problems associated with the multi-currency may at the end of the day be more acceptable than supermarkets giving lollipops as change at the till.