Analysing demonetisation of Zim$ Dr John Mangudya
Dr John Mangudya

Dr John Mangudya

Ian Ndlovu
THE January 2015 Monetary Policy Statement presented by Reserve Bank of Zimbabwe (RBZ) Governor John Mangudya declared among other important policy issues that ‘in line with the policy pronouncement made by the Minister of Finance and Economic Development in both the 2014 Budget Statement and the Mid-Term Budget Statement the Reserve Bank shall be demonetising the Z$ balances by  June 30 2015’.

The import of this policy move on the part of monetary authorities is to seal the fate of Zimbabwe dollar, which was formally abandoned in February 2009.

The basis for completely liquidating and demonetising the Zimbabwe dollar has been occasioned by macroeconomic fundamentals, which are currently weak.

According to the central bank governor, ‘the reality of the national economy is that all [key] economic fundamentals or indicators are weak to even contemplate the return of the local currency’.

From a policy crafting and policy implementation perspective the demonetisation of the Zimbabwe dollar is thus the last episode in the long drawn process of dollarisation [or the multi-currency dispensation] in Zimbabwe.

The rationale of this policy move must be premised on a desire on the part of central government to assure the transacting public and the investor community that there will be no knee-jerk return to the defunct Zimbabwe dollar.

Over the last three years there has been spirited debate, which centred on relevance of a domestic currency in reviving the economic fortunes of Zimbabwe. There were basically two sides to the debate.

On one side, there were those whose arguments were steeped in nostalgia and an appeal to political economy, which averred that for a country such as Zimbabwe to function without a currency, was equivalent to marching into the future without full national sovereignty.

The other side asserted that restoration of monetary sovereignty without first stabilising key macro-economic fundamentals such as minimum foreign exchange reserves equivalent to one (1) year of import cover, government budget, interest rates, level of domestic business confidence (business sentiment), state of (and confidence in) the financial sector, consumer confidence and health of the job market would effectively strangle an economy, which is emerging from the vicissitudes of the hyper-inflationary period (2003-2008).
The demonetisation process is thus a gesture on the part of the government ‘to formally pronounce the demise of the local currency’.

Questions have arisen about the efficacy of having ‘all genuine or normal bank accounts, other than loan accounts, as at December 31 2008 [being] paid an equal flat amount of US$5 per account’.

Questions have emanated from two premises. Firstly, the modus operandi of implementing the policy measure was not spelt out in the policy statement and thus the pronouncement has led to speculation.

Much of the speculation is on how the central bank will ensure restitution of US$5 to account holders who are either deceased, migrated to other countries or had their accounts closed when their banks stopped operating and surrendered their licences to the Reserve Bank of Zimbabwe (RBZ).

Since the central bank governor promised that ‘the Reserve Bank shall soon publicise the modus operandi of the demonetisation process’, it is the hope of this article that such a move will address these concerns.

Secondly, questions have arisen pertaining to the likely impact in terms of disposable incomes of giving past Zimbabwe dollar account holders US$5 each.

The question that immediately arose after the policy statement was: To what extent would individual ordinary citizens benefit from US$5 in terms of their welfare? This question is not easy to answer in definitive terms but what can be said is that from a macro-economic perspective an injection of US$20 million dollars by the central bank is a notable increase in money supply.

Nevertheless, this injection of money into the domestic economy is a far cry when compared to relentless macro-economic problems such as general investor fatigue and in some instances capital flight, low levels of capacity utilisation in key sectors of the economy and the unemployment problem.

In the final analysis, the demonetisation of the Zimbabwe dollar is a welcome gesture of goodwill on the part of the government since it contributes to ensuring stability in financial markets by signalling that the government is committed to the current multicurrency dispensation.

This was necessary because many domestic economic agents were speculating that maybe the bond coins, which were introduced in the recent past, were an attempt to reintroduce a domestic currency through other means.

Ian Ndlovu is an Economics lecturer at the National University of Science and Technology (Nust). He writes in his own personal capacity and can be contacted on [email protected].

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