The Vices and Virtues of a Multi-currency Economy

By Rejoice Ngwenya , Harare, Zimbabwe

Thursday, August 26, 2010

Adopting the use of ‘foreign’ currency as legal tender in one’s country has very little impact on a country’s failed state status. Since the  dollarisation of Zimbabwe’s currency, corporate budgets are more predictable.  However, public utilities still struggle with uneconomic tariffs while the large, obese coalition government that works on a cash budget gobbles the little revenue there is.  

The first learning point I have encountered is that adopting the use of ‘foreign’ currency as legal tender in one’s country has very little impact on a country’s failed state or HIPC status. Viewed through the prism of political judgement, almost two years after Zimbabwean authorities outlawed the discredited Zimbabwe Dollar [ZimDollar] in favour of the Greenback, the South African Rand and to a limited extent, the Botswana Pula; we are yet to emerge from our rogue state category. Conversely – at least with my experience as a student in Kenya in the Kenyatta-Moi era of governance – a dysfunctional political system has no bearing on a country’s economic performance. That is why Colombia, Egypt, China and Saudi Arabia still attract more Foreign Direct Investment [FDI] than my country, when in fact those countries are ‘less democratic’ than Zimbabwe.

If therefore asked the question: has the adoption of a dollarisation enhanced in any way, the personal and corporate lives of Zimbabweans, one is bound to get an array of diverse answers depending on which prism of interpretation is used.  When I visited CATO University in July 2008, one student intern  wanted to know how  it was like that I am alive coming from an economy whose lowest unit of currency was one billion dollars! My answer then was simple: we have adapted. In the same manner, if you asked me how it is to live in a country outside USA where legal tender is USD dollars, Rands, Pounds and Pulas, I will still reply: we have adapted! But there is more to it than what meets the eye.

The biggest tragedy is that Zimbabwe’s export capacity, its international reputation and ‘security status’ was decimated by Robert Mugabe’s intransigence, impunity and selfish arrogance. This means that we completely ran down our strategic reserves and could not replenish them because of diminished export capacity and inability to attract FDIs, multilateral support and tourists. And so even if Diaspora remittances continue to flow in, they are insufficient to sustain liquidity, money supply or capacity of banks to offer long-term credit. As economic consultant Dr Phineas Kadenge puts it, Zimbabwe now has no monetary policy!

Picture it this way: before dollarisation, business was operating at 10-15% capacity because the ZimDollar was not ‘exchangeable enough’ to recapitalise the productive sector. In other words, a typical clothing factory would not be able to go to its bank to exchange two hundred trillion ZimDollars for one hundred thousand US dollars to import better machinery or apply for letter of credit since banks did not ‘recognise’ the ZimDollar. The situation has somewhat slightly changed because the same clothing company is receipting its sales in US dollars although consumers do not make enough money to sustain retain sales. Because of this ‘timid’ liquidity, manufacturers have neither access to credit nor sufficient funds to recapitalise, so productive capacity or utilisation remains a bit static.

There is also inability of infrastructure to sustain anticipated increased productive capacity. Let me use the electricity utility company Zimbabwe Electricity Supply Authority [ZESA] as an example.  The Business Council of Zimbabwe – an umbrella body of local business associations – has always insisted that our country’s electricity demand at full productive capacity is in excess of 3000 megawatts.  Since energy is an ‘enabler’ and the country would require more than US$ six billion to get ideal electricity supply, the fact that we are producing just under 1000MW means that it is impossible to sustain a substantial increase in capacity utilisation because of what Kadenge terms the forward and backward linkages of energy and economic growth.    Ironically, before dollarisation, ZESA complained that the worthless ZimDollars could not be converted into capitalisation and debt relief. I pay an average of US$40 per month to the public utility, but still get only 6 out of 12 hours of electricity in my home. Why? Zimbabwean electricity consumers are not generating enough personal [USD] income to sustain ZESA. Now politicians have joined the rising crescendo of criticising ZESA for being corrupt, inefficient and over staffed. They have coerced the Competition and Tariff Commission into a fifty percent reduction in electricity tariffs. With no alternative independent energy suppliers in sight – barriers to entry are high – I do not see how ZESA will be able to recapitalise let alone pay its import bills to SNELL of the DRC, ESKOM of South Africa and CAHORA of Mozambique. So much for dollarisation!

The Coalition government itself is in deeper trouble. Remember the heady days of ‘Emperor’ Gideon Gono – the last monarch of the central bank of Zimbabwe [RBZ]? Mugabe used to print as much money as he wanted to finance his political misadventure – the ‘land reform’ and a bloated civil service of 200 000 teachers, 50 000 soldiers, 20 000 police, 6 000 prison officers, hundreds of diplomats and millions of ‘black farmers’. All this under the tutelage of ‘King’ Gono.

There is not enough space to say the best of my post-dollarisation experience [certainly without serialising the treatise!], but my conclusion is that both social and economic ‘indicators of success’ point towards improved lives of citizens.  The prevailing situation is much better than when the truant Gono and his arrogant boss Mugabe drove our inflation figures to billions, supermarket shelves emptied by price distortions, long caravans of migrants streaming out of Zimbabwe, creaky factory machines and empty hotel beds.  Latest reports are that we are on single digit inflation rates [4%], productive capacity is edging upwards 40%, and industry is experiencing less power outages while Zimbabwe’s vaunted human capital is showing sides of home sickness. Corporate budgets are more predictable, however, public utilities still struggle with uneconomic tariffs [or is it inefficiency?], and while the large, obese coalition government that works on a cash budget gobbles the little revenue there is. Mugabe has not stopped praising ‘successful’ black tobacco farmers, but they have kept their money from the formal banking system because they no longer trust banks. On the opposite income scale, villagers have no viable economy to access US dollars, except when they sell cattle. However, they still have access to farm inputs and groceries whenever their liquidity improves. Ironically, even when they make it to the nearest grocery shop, they encounter stone-faced shop assistants who cannot offer change in coins!

Rejoice Ngwenya is director of  coalition for liberal market reforms in Zimbabwe, and affiliate of and IMANI