Zim urged to adopt currency board

ZIMBABWE, which has experienced acute episodes of hyperinflation and exchange rate instability for at least two decades, should adopt a currency board to curb both vices, said Leon Africa founder Tinashe Murapata.

The economic crisis in Southern Africa is deepening, with the local currency rapidly depreciating and trading at $800 to the US dollar on the parallel market.

Similarly, official currency auctions and interbank rates rose on a weekly basis, but at a much slower pace.

Annual inflation rose to 191.7% in June from 131.7% in May. This has led to a spike in the prices of basic goods and services.

In an effort to solve currency problems and runaway inflation, the Governor of the Reserve Bank of Zimbabwe, John Mangudya, introduced gold coins.

The gold coins will be available for sale from July 25 in local and foreign currencies at a price based on the prevailing international price of gold and the cost of production.

But, in an article published in the Zimbabwe National Chamber of Commerce Report 2021-2022, Murapata, an economist, said that to solve the monetary problems at the root, Zimbabwe has two main options: cash dollarization or the adoption of a currency board.

A currency board is a pegged exchange rate mechanism that ensures full convertibility of the domestic currency into a foreign anchor or basket of currencies.

In this system, the total monetary base of the economy is supported or backed by international reserves. The pegged exchange rate creates a stable currency and stable prices, but takes away a country’s ability to increase its money supply

The resulting exchange rate means that monetary liquidity only increases when the country produces more goods and services for export. Conversely, when the country produces less, the money supply is reduced.

Murapata said the main cause of hyperinflation and exchange rate instability in Zimbabwe is the monetary authorities’ appetite for quasi-fiscal activities.

“If Zimbabwe is to adopt a currency board, all national currency issued will be fully backed by an anchor currency. The anchor currency can be a basket of currencies determined and weighted by our trading partners or hard metals like gold, silver and platinum,” he said.

“It could very well be a combination of the above, but essentially every national currency issued must be fully convertible on demand into foreign currencies at a fixed rate that does not change over time.”

Murapata said the currency board should maintain an international account where it stores or deposits all foreign exchange earnings as reserves. These reserves, he prescribed, should be held by the South Africa Reserve Bank (SARB) and the African Development Bank which will act as underwriter for each local currency issued.

“They will agree to guarantee the full convertibility of the local currency with what is in the reserves. Additionally, a weekly audit by an auditing firm confirms what is in the offshore reserves and in the issued currency,” he said.

Murapata said there was nothing wrong with a country holding its reserves abroad. China, Japan and many others hold reserves in America.

It is a measure of confidence that allows the markets to know precisely the reserves of the country, he said.

“This strict rules-based system will kill inflation overnight and bring exchange rate stability to the market. The market will begin to have confidence to bank its foreign currency with the understanding that when will require, it is not the Reserve Bank of Zimbabwe that must operate, but the currency board reserves held with the SARB,” he said.

Murapata said it would be easy for Zimbabwe to adopt a currency board and reduce the demand for US dollars. Trade with South Africa, China and Africa, he stressed, will be done in rand and yuan without the need for US dollars.

“As our exports increase, the money supply in the economy increases, but without inflation. This additional liquidity will fund domestic industries. Coupled with a functioning financial system, bank lending will increase from the current US$1 billion to US$6 billion,” he said.

“The attractive high interest rates will attract foreign investors and foreign capital to invest in Zimbabwe. Exchange rate risk has been determined to be the higher risk factor for investing in Africa than political risk. It goes without saying that this risk must above all be mitigated. A currency board achieves this.

He, however, said a currency board is not the panacea to Zimbabwe’s economic ills but is a necessary first step and the best policy intervention that will begin to address the monetary problems.

“It achieves stability and predictability. It engenders confidence in the financial system. When the currency board is in place, Zimbabweans, for example, will no longer have to worry about the rate and custody of US dollars. The focus becomes the production,” he said.

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