Structured currency may require a change of public perceptions

As the curtain drew on the year 2008, Zimbabwe was tottering in the throes of hyperinflation. The Zimdollar had taken a massive protracted beating which had to be halted. The inflation-weakened currency was officially laid to rest in 2009. In its stead, a basket of currencies was adopted as legal tender with the US dollar emerging as anchor currency.

STRUCTURED currency, by definition, simply implies currency that is regulated and made up of many parts. The Zimdollar has declined by around 40% since the beginning of 2024 largely driven by a sharp surge in demand for foreign currency on the back of an acute shrinkage in foreign currency (FX) inflows largely attributable to depressed prices on commodity markets.

As the curtain drew on the year 2008, Zimbabwe was tottering in the throes of hyperinflation. The Zimdollar had taken a massive protracted beating which had to be halted. The inflation-weakened currency was officially laid to rest in 2009. In its stead, a basket of currencies was adopted as legal tender with the US dollar emerging as anchor currency.

Fast forward to 2019, lo and behold Zimbabwe re-introduces its domestic currency! The belief by policymakers at that time was that economic fundamentals were in place to warrant re-introduction of not just national pride but, seignorage, as well as the ability to potently implement independent monetary policy. Policymakers believed that the revived currency would hold its own on the FX markets. Without casting aspersions on policymakers due to the fact that we all tend to become better analysts after the event, that the privilege of hindsight is that it always makes even the dullest among us appear like the greatest genius that ever lived on earth in their formulation of solutions to past challenges.

Be that as it may, I hold that the decision could have been delayed a bit further, particularly if the desire was to continue to hold the rate of inflation down.

Economic agents, who had lived through the 2007 to 2008 epoch, could have witnessed or directly suffered loss of value thanks to inflation ravaging the value of their savings. Interest rates could not constantly match the rate of value attrition.

Apart from losing value in monetary terms, a significant number of economic agents lost trust in money (read domestic currency) as a medium of powering transactions, retention of value as well as a type of investment. Most of the affected economic agents had already commenced switching their allegiance, so to speak, to other forms of investment vehicles, for example, buying of securities on the Zimbabwe Stock Exchange hence the resultant rallying of securities listed on the local bourse by the time the Zimdollar was finally laid to rest.

Other economic agents simply moved away from domestic currency to foreign currency. The key offspring that was birthed in the minds of most economic agents during that time is mistrust for domestic currency!

 Once a currency is perceived to be on a consistent free-fall path, only radical measures may be able to stop such a fall, albeit such measures can only normally break the fall for some time and not for long. It is much easier to regulate human being’s actions. It is never an easy thing to regulate perceptions.

Despite the good intentions of policymakers, coupled with hitherto unheard of interventions, policymakers could not figure out why almost anything they applied to address the challenges always found itself wanting in no time prompting them go back to the drawing board almost every day! The real reason why all those well-intentioned novel interventions failed to achieve the desired outcome was that the solutions largely addressed the symptoms and not the cause.

The main cause was the cemented unfavourable perception (mistrust) of the economic agents! As was the case then, so it appears to be the case now. We seem to have found ourselves exactly where we were in 2008. We appear to be focusing on the symptoms and not the cause, again!

Currently, existing headwaters of the river of value attrition, wherein the local currency is being tossed back and forth, are so strong that only a head-on approach is required to effect an ebbing of the torrent. The main tributary feeding into that river is economic agents’ perception.

Economic agents perceive the local currency as being overvalued, hence they do not desire to be found holding on to it longer than necessary. As rational beings, they quickly offload it to the black market as soon as they get it.

The result of those actions is excess supply of the local currency on the FX market which, in turn, leads to its exchange rate falling against hard currencies. When the value of the domestic currency depreciates on the parallel market, which unfortunately is where most economic agents find it more convenient to transact, the perception that the domestic currency is overvalued is bolstered. This triggers an unending downward spiral in the exchange rate which may not be easy to stem.

To check the downward spiral, policymakers need to either strategically withdraw the currency from the market (ie mopping up liquidity), or change the perceptions of the public to ensure that economic agents have a change of heart as far as the domestic currency goes or an outright bumping off of the domestic currency (re-dollarisation)!

On paper, it may be easy to believe that mopping up excess liquidity through open market operations such as offering Treasury bills (that is, selling TBs) could reduce money supply for domestic currency which, in turn, should trigger an appreciation of its exchange rate through the interplay of demand and supply. In sophisticated economies, sales of TBs coupled with interest rate hikes could generally lead to a dwindling of money supply.

Unfortunately, in economies that are like the local one, gains from such open market operations would be short-lived because of fiscal expenditure which, by the way, is necessary, for example, for financing of the National Road Rehabilitation programme, which unfortunately, takes us back to where we started when we were grappling with excess domestic money supply.

With that in mind, this intervention then largely becomes transitory and cannot hold down the exchange rate for long.

Changing perceptions of economic agents could solve the problem, if ever that was feasible. Perceptions fall under a discipline known as behavioural economics. Behavioural economics holds that economic agents are rational beings and because of that rationality they are generally observant and are always looking out for their own good. The majority of those who do not wish for a repeat of loss of value which happened to them in the transition from the first life of the Zimdollar to the basket of multiple currencies tend to harbour a significant level of negative perception towards the local currency.

It is not very easy to change those perceptions among that section of society. Some of them actually lost faith in banking institutions during that era and continue to hold on to that mistrust even to this very day.

Unfortunately, perceptions on the value of a currency cannot be dealt with through legislation. They are akin to true love which cannot be forced on a person. That unfavourable perception could largely explain why the success of government and monetary authorities’ interventions tend to be too shortlived for our liking. A significant fraction of economic agents just believes that the local currency is overvalued without any economically sound justification backing that belief.

One of the solutions being bandied is a structured (regulated) currency. Due to unfavourable perceptions, a structured currency could, unfortunately, suffer a similar fate as did other equally sound interventions before it. For as long as economic agents’ perceptions have not been altered, any solution with the Zimdollar will continue to be viewed with heightened scepticism which does not bode well for exchange rate stability under the proposed intervention. It is quite a mammoth task to convince sceptics that the proposed policy would work without first addressing issues around why they harbour those negative perceptions to start with.

I hold that it would be better to address the issue of negative perceptions first and foremost prior to introducing the raft of measures that will comprise the structured currency. Monetary authorities need to ensure that their credibility is perceived to be beyond reproach as they address the issue of  the introduction of the new approach to handling the currency.

If a rational being believes that something on offer has a lower value than what its seller will be asking for, unless the seller persuades the prospective buyer of the intrinsic or even hidden value of the item on sale, the buyer could simply walk away. Monetary authorities need to address key issues surrounding the perception of short-lived value preservation following interventions and how that would not be the case in the future.

Economic agents need to be assured of a clean break with the past. Unfortunately, monetary authorities cannot introduce pure gold coins for transactions because doing so would also create new challenges such as the coins being smuggled out of the country whenever gold prices increase or even smelted and sold locally, some agents could even withdraw those coins from circulation, while holding them as investment assets! Having currency backed by gold (the Gold Standard) could temporarily solve the perception conundrum. If people are made to truly believe that the currency is backed by gold in a vault somewhere, their perception of the value of the currency could be altered favourably.

Recent public disclosures allegedly made by responsible authorities so far indicate that a currency board could be part of the solutions that are envisaged. A currency board, by definition, entails having domestic currency fully backed (as in, 100%) by a foreign currency, for example, United States dollars with the issuing authority establishing a fixed exchange rate to that foreign currency. The crucial aspect of a currency board is that the issuing authority sincerely commits itself to exchange domestic currency for the anchor currency at the fixed rate whenever the public requests it. An observant person could already, by now, have noticed some similarity between this and the bond notes issue of the past.

A currency board arrangement is merely a variant of a targeted fixed exchange rate where just like Frederic S Mishkin in his book, The Economics of Money, Banking and Financial Markets, put it. Under a currency board arrangement, commitment to the fixed exchange rate is especially strong as conduct of monetary policy is essentially taken out of the hands of the central bank and it is put on auto pilot. A currency board has advantages which include, among others, ensuring money supply expands only when FX is exchanged for domestic currency at the reserve bank. The central bank, in a pure currency board, loses the ability to print money and hence trigger inflation. Since a stronger commitment to a fixed exchange rate is signalled by a currency board, it can effectively and promptly bring down inflation while minimising chances of speculative attacks against the domestic currency.

The most potent drawbacks, among others, of a currency board arrangement for a country like Zimbabwe is that the Reserve Bank of Zimbabwe would lose its ability to create money and act as a lender of last resort with their attendant undesirables such as inability to promptly intervene where there are threats to commercial banks’ abilities to meet depositors’ demands for their funds held by the commercial banks. Perceptions again could play a pivotal role in the success or failure of such an arrangement.

Perceptions are, by their nature, simply displays of feelings, attitudes and beliefs. I hold that if perceptions are not managed prior to the introduction of the structured currency intervention, its gains could end up being short-lived as has been with other equally potent interventions before it.

Re-dollarisation offers a somewhat more lasting solution to the challenge of an unfavourably unstable exchange rate. Arguably the most potent demerit of dollarisation for Zimbabwe is that it renders the country’s exports less competitive regionally due to the fact that Zimbabwe’s regional trading partners, in comparison, would suddenly have prices of their goods and services quoted at more competitive prices (in their respective domestic currencies). The exchange rate fluctuations of regional currencies against hard currencies generally move in favour of hard currencies which would make Zimbabwe’s output less competitive in the region.

Dollarisation also removes the ability of Zimbabwe’s monetary authorities to manipulate money supply to achieve their desired monetary aspirations on the economy. The country also loses seignorage. Dollarisation also implies that government debt would automatically be converted to US dollar or South Africa rand or whichever currency would have been settled for. While net lenders could welcome that, the scenario is not viewed similarly by net borrowers.

Government may loath the idea of re-dollarising because doing so converts all government debt, which has parts of it currently quotable in local currency to strictly FX-denominated debt. Moreover, government may also feel that re-dollarisation would be the equivalence of opening themselves up to attacks by armchair critics. I hold that it is better to have people mock you as you sort out your issues once and for all, than have them mock you ad infinitum as you incessantly grapple with a challenge that could be fixed once and for all.

A need for re-dollarisation is what normally results whenever an economy rushes to de-dollarise. Evidence abound on that. Re-dollarising is, however, not an indictment on policymakers’ abilities to solve a perpetual monetary crisis but it is a sign of vigilant proactive dynamism in painstakingly searching for vibrant optimal solutions to unending challenges that could be responsible for many sleepless nights to an economy’s monetary authorities. No lawful solution should be eschewed or regarded off limits in the quest for an effective solution to a perennial challenge.

When Zimbabwe dollarised in 2009, the country had to gradually build up its FX reserves which meant that economic agents accordingly adjusted their consumption and savings. Currently, the country may not have stockpiled US dollars or any other hard currency to enable its citizens to suddenly start transacting to the full in those currencies, but gains from deceleration of inflation and ability to plan could lead to greater investment were the economy to re-dollarise. With increased investment, both of the domestic and foreign type, unemployment figures would definitely come down and increased domestic output could lower the import bill which, in turn, could create further employment opportunities for the unemployed. Increased investment could also be a driver of increased exports, which would bring in more foreign currency.

Re-dollarisation would ensure that the country would avoid speculative attacks on the domestic currency because the said domestic currency would not be there anymore. With a currency board, speculative attacks are minimised, but would not be totally eliminated. Re-dollarisation is probably the surest, easiest and fastest way out of the current exchange rate and hyperinflation challenges.

It is an intervention that does not require any management of publics’ perceptions as an added bonus. Management of public perceptions is not an easy thing to do with time constraints and particularly when it has to be done with the same currency that economic agents would be regarding as not so appealing!

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