ZIMBABWE’S official month-on-month inflation figure for May was reported at 75,4% (CPI), by the Zimbabwe National Statistics Agency (ZimStats).
The annual inflationary pressures for the same month were 175%. Since the statutory body releases figures on blended inflation, without exclusive United States dollar and Zimbabwe dollar (ZWL) figures, some quarters have resorted to calculating the omitted calculations independently.
One such is Professor Steve Hanke, an American educationalist at the John Hopkins University in Baltimore. His latest measure of the Zimbabwe dollar month-on-month and annual inflation are 194% and 1 298%, respectively.
As can be seen, there is a large difference between ZimStats’ and Hanke’s figures but what is agreeable between the two is that the country is now in a hyperinflationary environment. Hyperinflation can be described as a situation whereby month-on-month inflation exceeds 50%.
Both Treasury and the Reserve Bank of Zimbabwe (RBZ) have previously intervened with responses aimed at quelling the turbulence. Some of the solutions have brought a level of stability. For instance, the
Ministry of Finance and Economic Development ordered that payments of taxes by corporates be rendered mainly in the local currency (ZWL).
Tax obligations, which were previously paid in foreign currency, will now be rendered using a 50% local currency component, instead of 100% forex. On the other hand, taxes due in ZWL will be paid strictly in the local currency with no election to pay using foreign exchange. This has had the positive impact of creating demand for ZWL, with the result of a firming, of both the official and parallel market exchange rates.
The official rate consequently gained 9% against the US dollar, from ZW$6 927 to ZW$6 327 at the RBZ forex auction on June 27. The parallel market rate, which had been reported to have reached ZW$10 000 for each US dollar, also marginally recovered, to the current reported rate of around ZW$8 400. The recent tax regulation has been reported to have caused an acute scarcity of the local currency on the market. However, some may argue that inflation and depreciation are a bigger risk than liquidity issues.
Thus, liquidity is a better option to sacrifice in the quest to control inflation.
Having gone through the recent marginal improvements, further attention, is required to remedy the crisis in a lasting way. It is in this regard that the RBZ should consider another round of currency reforms and redenomination of the Zimbabwe dollar.
The monetary values on supermarket shelves and payrolls are now difficult to interpret owing to the large figures. The massive numbers have a tendency of signalling a crisis and until they are reined in, the battle against inflation may continue to be lost.
On a psychological standpoint, economists may argue that the propensity of businesses and consumers to raise prices and hoard is higher when prices become extreme.
Redenomination is the process of removing zeros on bank account balances and the face value of bank notes so as to create a system were society and businesses can work with figures that are easier to calculate and manage. Thereafter, new bank notes, with lower values, will be issued and the older ones are phased out. The new, redenominated notes, will provide a chance for creating positive sentiment in the domestic economy, thereby, becoming a tool towards retaining depreciation and inflation.
In other regions, the process has been historically characterised by renaming the national currency so that the psychological impact on society is maximised.
For example in China, in 1949, the silver yuan was introduced to replace the gold yuan, which had undergone excessive depreciation. One silver yuan was worth fifty million gold yuan notes.
In Zimbabwe, by removing three zeros, the ZW$6 327 exchange rate, changes, to become ZW$6,33 (after rounding to two decimal places). The removal of zeros from all bank balances and accounting transactions will ensure that there is no change in the purchasing power of the redenominated currency.
The process may also be done in such a way that a new currency, for instance, the “Zambezi dollar”, is introduced and all domestic bank balances are transferred to the new sovereign money, at a rate of 1: 1 000. The net effect will be the same as removing the three zeros.
Now that the technical side of redenomination has been explained, it is paramount to look at the type of environment required before, during and after the process.
If certain economic principles are observed, then the country will not find itself coming back to another round of redenomination in the future.
Doing things right, once-and-for-all, will be key, as failure would be a wasted opportunity that may come with adverse costs for the nation. In this regard, the country needs a stable and clear, single exchange rate and thorough control on money supply growth. These conditions must be met, well-before the launch of the exercise.
When there is stability prior to the programme, the public will embrace and support the exercise. Issues around designing and launching of the new currency will also be discussed, later.
The choice of the exchange rate regime should be firmly decided, on and known, by the public and on the international foreign exchange markets. The rate should be the same for both formal and informal economic participants. A clear decision on whether the country will choose a fixed, floated, or managed-float rate is vital before working on the reset.
Source ByO24
