Currency reforms in Zimbabwe : an analysis of possible currency regimes

Abstract

The Government of Zimbabwe (GoZ) adopted a multiple currencies regime (MCR) in February 2009 and demonetized the Zimbabwean dollar in July 2009 after almost a decade of economic crisis. The MCR approach resulted in stabilizing the Zimbabwean economy; however, there are remaining concerns that need to be addressed. The purpose of this paper is to explore various options of currency regimes that could be adopted in the short and medium term in order to consolidate economic stabilization and recovery in Zimbabwe. The debate on currency reforms comes at a favourable juncture in the country's recent political economy, marked by the signing of the Global Political Agreement in September 2008 and the inauguration of the Government of National Unity in February 2009. In March 2009 the Government adopted the Short Term Emergency Recovery Programme (STERP) whose major goal is to stabilize the economy through increasing capacity utilization in all sectors of the economy, ensuring availability of basic goods and services and rehabilitation of collapsed infrastructure and service delivery. Since the adoption of the MCR there has been a marked decline in inflation to single digits, an increased availability of basic goods and services, as well as a slow recovery in capacity utilization. However, further progress is hampered by the biting liquidity crunch that is affecting the financial sector which is worsened by the loss of lender-of-last-resort function of the Reserve Bank of Zimbabwe. An analysis of the data suggests that at the core of the economic crisis was the Government's inability to borrow from domestic and international debt markets leading to excessive money printing to finance the budget deficit. This led to hyperinflation, worsening social conditions, negative GDP growth, and worsening balance of payments position. The paper's review of international experiences of economic crises highlights a number of conditions crucial for a successful currency reform. These conditions are: monetary policy reform, fiscal reforms, central bank reforms, socio-economic convergence, establishment of social safety nets, financial sector reforms, re-engagement with development partners, structural reforms, and strong leadership and political commitment. The paper also places emphasis on timing and sequencing of reform actions. The paper proposes that the optimal choice of a particular currency regime be based ona framework that takes into account the following: (a) the advantages and disadvantages of a particular regime, (b) the need for correct timing and sequencing of policy tools and reform actions, (c) the prior capacity conditions in the country, and (d) the political commitment to undertake the necessary reforms. It is imperative to note that these reforms are no quick fixes for designing economic stabilization and recovery programs needed in Zimbabwe. The Zimbabwean authorities and stakeholders need to fulfil the aforesaid preconditions for successful currency reform, before collectively selecting from among the various options.