Zimbabwe’s Currency Dilemma

In February 2024, the local policymakers announced their intention to introduce a structured currency as part of further monetary reforms aimed at achieving stability of the domestic currency. The move was necessitated by the quest to defend the local currency against all odds by linking its intrinsic value to assets like gold. ?A structured currency is a financial product that blends components of traditional currency investments with derivative instruments. It is a specially made investment vehicle intended to help achieve particular financial goals (highly customized) or protect against currency risks (hedging). In developed economies like the US, UK, Hong Kong, Germany, and Singapore, these products are typically offered by financial institutions and are available to institutional investors and high-net-worth individuals.

The announcement of the introduction of a structured currency has raised mixed sentiments among economic participants over the past month. ?One can be of the view that this is a commendable move in fostering price stability by reducing inflationary pressures. When a currency is stable, it offers a dependable unit of account and medium of exchange, enabling people and businesses to confidently plan and conduct transactions. In addition, a commodity-backed currency can help in lowering transaction costs related to exchange rates and currency volatility. Companies will be able to transact without having to constantly convert currencies or use time-consuming and expensive hedging techniques.

However, on the other hand, one can also view this as a mouth-filling technical term that may not yield the intended results like other past monetary reforms. It is worth noting that over the last two decades, Zimbabwe has gone through several periods of monetary reforms, yet there is little to no sufficient evidence of registered success in achieving much-needed macroeconomic stability. Some of the monetary reforms include the introduction of bearer checks (2003), multicurrency system (2009), bond notes (2016), RTGS (2017), mono-currency (2019), the use of the US dollar for goods and services priced in local currency (SI85/2020), Dutch auction system (2020), dual currency system (SI 118A/2022), gold coins (2022) and Zig gold-backed digital coin (2023). Despite all these various attempts, Zimbabwe is still struggling to establish a stable macroeconomic environment.

Lack of public confidence in monetary authorities is one of the chief reasons for the continuous demise of the local currency. Past repeated monetary policy missteps have eroded public confidence over time, and now economic agents never seem to desire to hang onto any local-issued currency because of a lack of public trust. The US dollar has become the reference currency in the pricing of goods and services. The current scenario is supported by the Lucas critique theory (1976) which argues that shifts in economic policy regimes will lead economic agents to adjust their behaviour and this will result in changes in economic relationships over time.

Money is a component of both the production and consumption utility functions and rational economic agents will always select a currency that will maximize their utility. Central banks only endorse and issue currencies to establish them as legitimate legal tenders and regulate them. This means that for central banks to register any success in influencing certain macroeconomic variables through monetary policy, the rational expectations of economic agents should take centre stage in the decision-making process. It is, therefore, na?ve to try to introduce any further monetary reforms in the absence of public confidence and expect different outcomes.

To win back public trust and solve the long overdue currency problem, local officials need to make thorough and well-coordinated efforts over time. They need to periodically consult relevant industry participants and obtain market feedback to inform their decisions. In this way, economic players will be able to assume control over the decision-making process and policies (societal cohesion). After consulting, it is also important to allow recently implemented policies to yield results before enacting further improvements (policy sequencing). ?

On the other hand, the government of Zimbabwe now needs to walk the talk on the formalizing of the informal sector if any further monetary reforms are to influence the entire economy. The informal sector is the engine of Zimbabwe's economy and is estimated to be 64.7% which represents approximately $46 billion at GDP PPP levels according to the World Economics Quarterly Informal Economy Survey. The majority of US dollars that are not banked are under the grip of this sector. This makes the impact of any monetary reforms ineffective on this sector of the economy.

Additional necessary conditions for restoring the stability of Zimbabwe's local currency include increasing local production, international collaboration and support, structural reforms, and political stability. Of these factors, political uncertainty continues to be Zimbabwe's greatest risk, significantly undermining the country's economic growth prospects. Political uncertainty encourages unpredictable economic policies, which makes it difficult for companies, investors, and market participants to make well-informed choices about currency, exchange rates and investment decisions.

Furthermore, political instability dents the image of the country. This negatively affects the relations with foreign financial institutions and development partners who can provide advice and expertise in implementing reforms. Collaborating with international organizations such as the International Monetary Fund (IMF) can make it easier to acquire financial help, policy recommendations, and technical assistance. The public’s critical confidence in the local currency would not materialize without significant political reforms.

?

?

?

?