RESERVE Bank Zimbabwe governor John Mushayavanhu has hinted at a government plan to set up a quasi-currency board as the authorities battle to save the value of the domestic currency and restore confidence and macro-economic stability, The NewsHawks has established.
BERNARD MPOFU
The country is battling rising inflation, a weakening domestic currency, power shortages and high unemployment levels, among other economic problems.
Mushayavanhu, the new central bank chief who took over from John Mangudya, recently launched a new currency called Zimbabwe Gold (ZiG) which will replace the Zimbabwe dollar/bond notes whose value had been wiped by chronic high inflation. He said ZiG would be backed by the country’s gold and foreign currency reserves.
According to the central bank, a structured currency is generally defined as a currency that is pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets (potentially including gold).
This, the RBZ says, means that a central bank can only issue domestic notes and coins when fully backed by a foreign “reserve” currency or foreign exchange assets and that the currency is fully convertible into the reserve currency on demand.
“The structured currency, as defined, is different from the currency board system, although it has some features,” the central bank says in a statement.
“The structured currency being introduced by the RBZ will be based on a market-determined exchange rate system as opposed to a pure currency board system which is based on a fixed exchange rate system and set by statute. The currency board system and structured currency system are similar in the currency anchored where the reserve money is 100% covered by reserves.”
Already the government has a Monetary Policy Committee which technically monitors key issues such as money supply growth and inflation, the board could be another layer of bureaucracy.
Last month, Finance minister Mthuli Ncube announced that the government will soon embark on currency reforms to save the domestic currency from collapse. The Zimbabwe dollar has since 2016 gone through several episodes of currency volatilities.
“The idea going forward is to make sure that we manage the growth of liquidity which has a high correlation to money supply growth and inflation. The way to do that is to link the exchange rate to some hard asset such as gold,” said Ncube in a Press briefing.
“To do that you have to have some sort of currency board type system in place where the growth of the domestic liquidity is constrained by the value of the asset that is backing the currency.”
During the 1990s there was renewed interest in the adoption of currency board agreements (CBAs) in countries like Argentina, Bulgaria, Bulgaria, Estonia and Lithuania.
In general, the establishment of CBA involves close coordination among the authorities including the highest level of government, the Finance ministry, the central bank, Justice ministry and other agencies.
According to a paper done by the International Monetary Fund titled Making a Currency Board Operational, one critical characteristic of a CBA is that fixed exchange rate is established by law. This means it may take time to establish the CBA and will involve bringing lawmakers, the public and the media.
The primary objective of CBA, the IMF says, is to maintain the foreign exchange cover of the designated domestic liabilities and to demonstrate frequently that it is doing so. The balance sheet of the central bank — ideally as confirmed by an external audit — must therefore be re-specified so that assets and liabilities of the “currency board” can be separately identified.
Under a currency board, the management of the exchange rate and money supply are given to a monetary authority that makes decisions about the valuation of a nation’s currency.
While currency board regimes are often praised for their relative stability and rule-based nature, they also have downsides.
In fixed exchange-rate systems, currency boards don’t allow the government to set their interest rates. That means economic conditions in a foreign country usually determine interest rates. By pegging the domestic currency to a foreign currency, the currency board imports much of that foreign country’s monetary policy.
In his book titled Zimbabwe: From Hyperinflation to Growth, which was published in 2008, United States-based Johns Hopkins University’s applied economics Professor Steve Hanke said the hallmark of Zimbabwe’s economic collapse was hyperinflation.
“The source of Zimbabwe’s hyperinflation is the Reserve Bank of Zimbabwe’s money machine,” Hanke wrote.
“The government spends, and the RBZ finances the spending by printing money. The RBZ has no ability in practice to resist the government’s demands for cash. Accordingly, the RBZ cannot hope to regain credibility anytime soon. To stop hyperinflation, Zimbabwe needs to immediately adopt a different monetary system.
“Any one of three options can rapidly slash the inflation rate and restore stability and growth to the Zimbabwean economy. First is ‘dollarisation.’ This option would replace the discredited Zimbabwe dollar with a foreign currency, such as the US dollar or the South African rand. Second is a currency board. Under that system, the Zimbabwe dollar would be credible because it would be fully backed by a foreign reserve currency and would be freely convertible into the reserve currency at a fixed rate on demand. Third is free banking. This option would allow commercial banks to issue their own private notes and other liabilities with minimum government regulation.
“Central banking is the only monetary system that has ever created hyperinflation and instability in Zimbabwe. Prior to central banking, Zimbabwe had a rich monetary experience in which a free banking system and a currency board system performed well. It is time for Zimbabwe to adopt one of these proven monetary systems and discard its failed experiment with central banking.”
