For the past three months or so, central bank authorities have been advancing efforts to introduce bond notes, which they admit is not money that can be used elsewhere across borders. Their chief motive is to encourage exports by easing cash shortages within the multi-currency system.
Brian Tavonga Mazorodze
It is however not so meaningful to try to promote exports in a country that is not producing. By saying exporters are suffering from cash crisis, the government is simply testifying its ignorance on the real issues affecting our exporters. Our exporting firms have been largely hurt by the strengthening of the dollar in relation to Zimbabwe’s regional trading partners.
What this means is that our exports have become more expensive on the regional market. In open economy macroeconomics, an overvalued currency results in a loss of economic competitiveness. For sectors that produce homogeneous and non-differentiated products, market power is non-existent and a strong currency reduces their profit margin which compromises their financial health.
The exchange rate has also an expenditure switching effect in the sense that if it is overvalued, domestic consumers will shift their consumption from domestic to foreign produced goods. This is the main reason why most Zimbabweans have developed a strong appetite for South African products in the recent years, a situation which has widened our trade deficit.
That having been said, introduction of bonds may not be the solution. Rather, the government may consider two alternatives other than bond notes.
The first alternative option is for authorities to directly confront the overvaluation by internal devaluation particularly through cutting fiscal expenditures in the areas of public wages. This option is however less desirable in an economy where civil servants have low incomes and therefore low purchasing power.
The second and promising alternative could be the use of the Rand as a nominal anchor as opposed to the dollar. Using the rand as the nominal anchor brings three advantages. First, the rand has been weakening in the recent years and using it as a nominal anchors would encourage our exports on the regional market leading to an export-led growth.
There is almost a consensus in empirical literature that the Asian success measured in terms of high growth rates in the past two decades or so was correlated with deliberate currency weakening. Second, using the rand as a nominal anchor would foster and strengthen trade ties between Zimbabwe and South Africa. Third, since most Zimbabweans have sought shelter in South Africa on the back of the persistent economic challenges that has been facing our country, using the rand would allow our country to receive more remittances. Currently, Zimbabweans working in South Africa cannot send money back home because of the strong dollar.
If monetary authorities advance their efforts to introduce the bond notes, then the government would need to first ensure that it has put in place measures to stimulate domestic production otherwise introducing bond notes in an economy that is not producing could be inflationary. This point comes on the back of the fact that there is a high possibility of the central bank resorting back to its tendency of monetizing the economy through printing too much bonds in a haphazard fashion. People have totally lost confidence in the central bank and regaining that confidence back will be a gradual process not an event. It has to start now. The economy is already bleeding.
Brian Tavonga Mazorodze is a Masters Student in Economics at University of Zululand in South Africa. He can be contacted on brianmazorodze@gmail.com
