The Brett Chulu
THE purpose of this article is to explore the extent to which money supply growth not backed by real economic growth in Zimbabwe has impacted on the value of the various currencies the country has adopted since 1980.
The outcome of this study will inform the extent to which the independence of a monetary policy committee should be conferred in order to preserve the integrity of Zimbabwe’s fiat currency, current and future.
Essence of money
Elementary economics defines the basics of money: “. . . the wealth of a community exists in the goods and services it produces, and . . . money is merely a convenient way of measuring wealth.”
Zimbabwe has had a succession of fiat currencies from Independence in April 1980 to the present, be it local or foreign adopted as part of the multi-currency basket from February 2009 to June 24 2019. In economics, fiat money is simply a token of people’s perception of worth.
A well-known commentary on economics explains the link between the value of a fiat currency and an economy: “The stronger the economy, the stronger its money will be perceived (and sought after) and vice versa.”
The causal mechanism is people’s or currency users’ perception of the worth of the currency. The same commentary explains the causal mechanism: “However, people’s perceptions must be supported by an economy that can produce the products and services that people want.”
The commentary caps the argument: “Today, the value of money (not just the dollar, but most currencies) is decided purely by its purchasing power, as dictated by inflation.” (parentheses not mine).
Although it is well-known that inflation can surge in conditions of unemployment, the following assertion is a widely accepted definition of inflation (it is not the only definition): “A condition of excess aggregate monetary demand over aggregate supply in conditions of full employment.” This is commonly simplified as “too much money chasing few goods”.
Monetarist economists leverage on this definition to argue that the general level of prices in an economy is directly related to money supply and the velocity of circulation of the money and inversely to the number of money transactions. The relationship of the four variables is still a subject of debate.
A conceptual pillar that can be easily overlooked is the definition of money as a medium of exchange. What gives value to money is what is exchanged (the produce).
Put differently, money must be backed by production of goods and services that have utility.
Acceptable money has three basic functions: measure of value, store of wealth and standard of deferred payments. If money begins to fail in all or some of these functions, it loses acceptability; it loses value in the eyes of the users, be they consumers or producers. The other characteristics of money are stability of value, durability, divisibility, portability and uniformity.
The phases of Zimbabwen currency and transitions will be analysed from the foregoing theoretical framework.
Zimbabwe has gone through three currency phases and is expected to enter a fourth one.
Independence to February 2009
This phase marked a transition from the Rhodesian pound to the Zimbabwean dollar in 1980. There are two sub-phases: pre-land reform (1980-1997) and fiscal expansion and post-land reform (1998-February 2009).
In the first sub-phase, the Zimbabwean dollar retained value due to the preservation of production buttressed by the then new prime minister, and now late former president Robert Mugabe’s reconciliatory stance.
This provided the political stability to prevent a slump in production. Inflation averaged 3,6% in 1980. It averaged 12% in the period 1985-1990. An off-trend in inflation of 31,85% was recorded in 1983—it was due to the drought. Another off-trend spike was 45,72% inflation in 1992, again, driven by drought. The average inflation between 1993 and 1997 was 20%. These inflation spikes represent a significant loss of the Zimdollar’s buying power that is directly related to significant once-off reduction in economic output, mainly agriculture.
Once agricultural production levels re-set, inflation drastically subsided. In 2018, Reserve Bank of Zimbabwe economists showed that the period of low inflation between 1980 and 1997 was associated with high real GDP growth, with the converse being true.
The second sub-phase opens with the first episode in post-Independence Zimbabwe, where fiscal indiscipline resulted in the debasing of the Zimdollar. A payout of the equivalent of
US$1 315 (ZW$50 000) each to Zimbabwe’s war of liberation veterans depleted foreign currency reserves at the central bank from US$760 million in January 1997 to US$255 million in November of the same year.
The dramatic loss of value of the Zimdollar was immediately registered in the stock and forex markets; the Zimdollar crashed by 71,5% and the stock market fell by 46% on the now infamous Black Friday on November 14, 1997. In short, confidence in the Zimdollar plunged overnight.
This was shortly followed by more fiscal indiscipline through the funding of the Democratic Republic of Congo war beyond the capacity of the national budget.
Two years after Black Friday, land seizures began, plunging the real economy to unprecendented levels.The drying of external support for balance of payments and lines of credit further decimated production. The central bank entered into quasi-fiscal activities to try and ramp up production in agriculture, while financing expensive social safety nets projects, all funded by money-creation in the middle of record low levels of production in the real economy.
The gross domestic product responded by falling by 50% during the second sub-phase. Hyperinflation accounting was adopted by listed firms. The pre-conditions for adopting hyperinflation accounting as per International Accounting Standard 29 indicate a very low confidence in a local currency.
Therefore, the Zimdollar during this phase was debased by a combo of related snowball effects, with money-creation being the policy response to arresting a deteriorating socio-economic environment birthed by a combination of fiscal indiscipline and extremely low production levels, hyperinflation, being the visible expression of “too much money chasing too few goods”, hence a serious erosion of perception of the Zimdollar as money. The Zimdollar lost all the three functions of money, namely: measure of value, store of value and standard for deferred payments.
February 2009-June 24 2019
Phase II has two sub-phases: The Government of National Unity (GNU) period and the post-GNU period. The ushering of the Government of National Unity saw the Zimdollar being demonetised in February 2009 and in its place multi-foreign currencies were adopted as formal tender. This monetary policy choice held the hope of making money-creation by central bank impossible as it lost the power of seignorage.
The fiscal choice made by the Treasury during the GNU era, was non-expansionary, known as you-eat-what-you-kill. Political will saw monetary expansion to finance budget deficits ceasing because there was no budget deficit to finance. In sub-phase I, a budget surplus was recorded for three consecutive years: 0,4% of GDP in 2009, 2% of GDP in 2010, 0,2% of GDP in 2011. In 2012, a negligible budget deficit of 0,1% of GDP was recorded.
In terms of the multi-currency, all money supply was backed hard forex deposits. The confidence in the multi-currencies was shown by low year-over-year inflation; 3,1% in 2010, 3,5% in 2011 and 3,7% in 2012. The fundamental driver of the confidence in the currency was real GDP growth which reached a high of 9,6% in 2010 and tapered off to 5% at the close of this phase.
l To be continued next week.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — [email protected]