Strengthening the independence of the Reserve Bank of Zimbabwe (RBZ) and improving its governance and controls will help improve the confidence required for Zimbabwe to reintroduce a local currency to ease the prevailing liquidity crisis, the International Monetary Fund (IMF) hassaid.
Zimbabwe abandoned its currency in 2009 in favour of a basket of multi-currencies dominated by the United States dollar to halt hyperinflation which had rendered the local unit worthless. But rising demand for the greenback which outstrips export receipts has pressured government to consider bringing back a local unit.
Last month, Finance and Economic Development minister Mthuli Ncube told Bloomberg TV that a fully-fledged currency will be in place within 12 months.
IMF Resident Representative for Zimbabwe Patrick Amir Imam told Business Times that it does not matter which currency regime is in place as long as the pre-requisites for currency stability are met adding the decision on whether to introduce a national currency rests
“Having said all this, strengthening the independence of the RBZ and improving its governance and controls will further help to gain confidence in the new currency,” Imam said, adding that the financial autonomy of the central bank has been challenged in recent years, as it extended significant credit to the government through statutory
“Thus, improving the governance and financial autonomy are prerequisites for a more independent central bank to conduct monetary policy, and will help further the stability of the new currency.”
The central bank was accused by economists of failing to rein in government’s expenditure through issuance of Treasury Bills (TBs). TBs issuances increased to US$7,6bn by end of August 2018 from US$2,1bn in 2016. Treasury Bills to GDP ratio jumped to 36,5 percent by end of August 2018 from 4,4 percent. According to Treasury, these TBs were issued through private placement unlike the auction system, which is more market-oriented and improves the process of price discovery and better pricing. Treasury reported last year that government’s overdraft at the central bank was US$2,3bn against the stipulated limit of US$762,6m in the eight months to August. Government borrowing from the central bank is capped at 20 percent of its revenue in the previous year.
Before his reappointment last week, central bank chief John Mangudya
was under pressure from political actors who were lobbying against the
reappointment, blaming him for rising prices triggered by the shortage
of foreign currency.
Imam said there “is a common understanding among all stakeholders” that Zimbabwe needs a stable currency to prosper adding that there are pros and cons of having a dollarised system in place or a local currency.
“The history of Zimbabwe has shown that a dollarised system can succeed as it did after the hyperinflation period, when the right conditions were in place, or that it can fail, as it did in the past two years when the pre-requisites are lacking,” Imam said.
“Similarly, Zimbabwe’s history also illustrates that having one’s own currency can work, as it did after Independence, or fail, as it did in 2008/09, depending on whether the macroeconomic conditions for stability are in place.”