Eddie Cross
Let’s first understand how we got where we are today. At Independence, this country had the strongest currency in the region. The exchange rate was 2:1 with the US dollar, that was two US dollars for each local dollar. I was critical of that because I thought that we would be better off with a weaker currency. The Reserve Bank and the Ministry of Finance maintained a disciplined and market based set of policies which had held the currency steady right through the war of liberation and the 15 years of mandatory UN Sanctions.
These strategies held us together for the first decade but fell apart when the Ministry of Finance failed to maintain macroeconomic stability and the Reserve Bank was forced to print money. This came to a head between 2000 and 2008 and in the process the local currency became worthless. By 2009, we had little choice but to allow the use of foreign currencies for local transactions. In a year the main currency in the economy was the US dollar.
We must talk a bit about the US dollar which is almost a commodity in international markets. An extraordinary 70 per cent of all the cash currency in the world is USD. It is the currency of crime, money laundering and prostitution. In many countries it is the one currency that you can transact on the street and one of the largest businesses in the world are the printing presses of the US Central Bank. When we dollarised in 2009, the US Government did not complain or try to prevent us doing so, in fact, they welcomed another client. They have harsh sanctions on us in every other sphere, but not this one and I can go to an ATM in my hometown and draw brand new notes every day.
But what it meant for us as a country is that control of monetary policy was transferred to Washington DC. We greeted it with open arms as inflation simply stopped. What we had in our pockets was real money, we could spend it everywhere. We could buy whatever we wanted. We became a dumping ground for our neighbours and I saw products from the region in our markets that I had never seen before. Foreign cash flooded the market as people who made money abroad in criminal activity or gambling brought their “dirty” money here to be “cleaned”. They even paid a premium for gold and diamonds to get their hands on a product that would be fungible.
When we had our own currency, our Reserve Bank printed money, first on paper and then electronically, but in well excess of our requirements. The result was what I called the “rat syndrome”. You earned your salary, put into your pockets when you got paid, but when you spent it, it no longer had the value it had when you first got it. The Reserve Bank was a rat, eating your money even while it was in your pocket. When they found that they could print currency and call it US dollars and transfer the stuff to your bank accounts, the results were not the same because people thought that what they had in the bank was real money.
It came as a huge shock when in 2019, our new Minister of Finance said to us that we were not rich, we were poor and what was in our accounts was not real dollars but counterfeit. That was not true of the physical cash on the street and our economy turned to cash as the only means of really knowing what was going on. That then describes where we are today. The great majority of all cash transactions are in actual US dollars. You hardly see any local currency, that is reinforced by the fact that our Reserve Bank does not print the local currency.
However, the local currency is still used for electronic transactions. In local markets for goods and services it covers quite a large per centage of transactions. It still dominates the rest of the market. Firms discourage the use of the local dollar because they want the “real stuff”. Prices are calculated at a rate well above the bank rate. Inflation in local markets and expressed in local dollars is dictated by this practice and continues to be at unacceptable levels.
The fact that we have effectively dollarised has far reaching implications for us as a country. Our industry is struggling to compete, imports are being boosted to the detriment of all local business, curbing employment creation. Buying US dollars for local use is expensive and does little to improve our banking system. When you print your own currency you make very large profits which go into strengthening the balance sheet of your Central Bank.
We need our own currency, that is agreed, but how to get there? Every country that has dollarised will tell you that its like a drug, very difficult to stop the addiction.
A start has been made; the Reserve Bank has been instructed not to print money in excess of what we need. The quasi fiscal activities of the Bank have been curtailed and the market for currency moved back into the interbank market where it should be. In addition, this new market arrangement has stabilised the exchange rate at about 4500 to 1. The Treasury has strengthened demand for the local currency by insisting that some taxes be paid in RTGS dollars. But this is not enough.
In the past 6 weeks it has been clear that someone in authority has decided to hold the exchange rate at 4500 to 1 after a period when the local dollar strengthened substantially. Why they did so seem arbitrary and not market based. This week there two disturbing movements – the bank rate slipped for the second week in a row, but more importantly, the PMR rate went from about 5500 to 7000. Say what you like, the latter represents those who “make the market” and this represents the real market rate more than the bank rate.
This is not desirable or even necessary. Our export receipts are increasing by 30 per cent per annum and we have a significant balance of payments surplus. If we had a real market for hard currency and a proper local currency in adequate supply, there is no reason why our own dollar could not be 1 to 1. None at all. In Zambia where they floated their own currency and they removed two noughts, it has settled down to where it is today. The Kwacha is accepted everywhere and they have confidence in the currency. We are in a much stronger position to follow their example.
What should we do to make a start towards what might be regarded as a normal situation going forward. I suggest the following as a step by step approach: –
- Allow the interbank market to operate freely and let supply and demand determine the exchange rate without interference. The weekly auction should be closed down as it no longer serves any purpose and the forced conversion of foreign exchange earnings at an artificial exchange rate should be scrapped.
- The next budget should include a clear program to make all Statutory charges and taxes payable in local currency.
- The Reserve Bank should be instructed to issue a new local currency and we should take three noughts off the present dollar. The Bank to ensure that at least 15 per cent of all currency on issue is in the form of paper currency printed for this purpose with a coinage for change.
- Allow the use of the US dollar in local markets but indicate that within a set period of time the US dollar would be demonetised for local transactions.
- Provide protection for hard currency accounts in both corporate and personal hands. Allow these accounts to continue to operate indefinitely.
- Scrap exchange control on all current account transactions.
- Set a floor price for hard currencies being traded with the Reserve Bank buying in currency for reserve purposes and keeping the local currency from becoming too strong to support exports and discourage imports.
- Anyone requiring hard currency for whatever purpose, including the State, to buy their needs on the interbank market.
Do that and this country would change overnight. It’s time for courage.
Post published in: Featured