CURRENCY BOARD & ZIMBABWE’S MACROECONOMY: THE PRACTICAL QUESTIONS
🧵🧵
I see the idea of replacing the @ReserveBankZIM with a Currency Board (CB) is slowly gaining traction amongst some circles of Zimbabwe’s business & policy community.

What are the practical steps to CB?

1/ What is a CB?

It is essentially an arrangement where a country’s currency is backed 1:1 with reserves of some anchor currency

This has the effect of fixing the exchange rate of the CB country to the anchor currency.

But how does the CB deliver macroeconomic stability?

2/-

ZIMBABWE ECONOMY: BUSINESS & DEMOCRACY

I think at some point we have to go back to basics and ask: while democracy is important for countries to succeed, what is the role of business?

I think this question can help unpack a fundamental blind spot in many political systems

1/- Often democracy is seen as a process of appointing community leaders - whether at local or national level

People vote or exercise their democratic right, the result which gives a political party the right to form a government according to a country’s constitution

2/-

ZIMBABWE CURRENCY AND THE SPECULATIVE BUBBLE

So, on Saturday 7 May 2022 the President of Zimbabwe announced a raft of measures to try and stabilise the ailing Zimbabwean dollar (ZWL)

Key among them is what appears to be blanket ban on all bank lending - a drastic measure!

1/- Most economists and people in business have been surprised the government could introduce such a measure given the critical role that credit plays in the function of modern day economies

Businesses need credit to smooth out cash flows, invest and to absorb economic shocks

2/-

ZIM PRESIDENT’S MEASURES TO RESTORE CONFIDENCE

Off all the measures the one that is most mind boggling is the suspension of bank lending. That effectively shuts down the economy!

For how long? We will need to wait and see? But this could have many casualties

1/- Banks are a central pillar in any economy through their credit function

That is why the world over governments will intervene to provide assurance that banks can continue their credit function

Well let’s draw lessons from FX market!

2/-

https://twitter.com/mutungadzimwe/status/1523220657437233152

ZIMBABWE CURRENCY: ARE RESERVES THE ANSWER?

🧵🧵🧵

As Zimbabwe’s currency troubles deepens, we are all frantically looking for solutions. That’s how much we love Zimbabwe!

I see the idea of reserves gaining traction with some. BUT do reserves work?

1/- For a long time reserves have had a key part in currency management - mainly cushioning IMPORTS from fluctuations in foreign currency earnings.

It is for this reason that reserves are often measured in terms of months of “import cover”

2/-

DUAL CURRENCY, CAPITAL MOBILITY AND EXCHANGE RATE STABILITY: PROSPECTS FOR THE ZWL

🧵🧵 THREAD 🧵🧵

As the ZWL continues to rapidly lose value against the USD, a big debate is emerging: whether Zimbabwe should just abandon the dual currency regime?

1/- Some argue the ZWL has no future, it should be abandoned pronto and the economy must fully dollarise or adopt the ZARand

Others are of the view that the ZWL is the future; the USD is bad for competitiveness; Zimbabwe need its own currency and must work hard towards it

2/

ZIMBABWE CURRENCY AND THE CREDIT MARKET - A FOLLOW-UP

Thanks to all who engaged on my thread on the role of credit market in exchange rate stability

I got many interesting comments and questions, which made me think of a follow-up

1/-

https://twitter.com/mutungadzimwe/status/1514521973145100291

The questions and comments broadly fell into categories:

➡️ my thread was over complicating the issue, RBZ should just stop printing ZWLs

➡️ delivering high-growth businesses to stimulate credit market will take years, what do we do now

These are welcome legitimate points

2/-

ZIMBABWE CURRENCY AND THE CREDIT MARKET

So, the “rate” has gone crazy in recent weeks

Which rate?

Well, if you are Zimbabwean you will know I am talking about the ZWL to USD exchange rate. That is the rate that matter to most these days

The ZWL seems to be in free fall

1/- To many it might seem strange the “rate” is on the slide when the country has registered spectacular growth in foreign earnings

Between 2020 to 2021,

➡️ export earnings grew by over 60%
➡️ remittances grew by around 40%

That is some boost in foreign currency supply!

2/-

PRINTING MONEY AND INCREASING MONEY SUPPLY: DEMYSTIFYING THE ECONOMICS

“Printing money” - the dreaded phrase by almost all economists! And rightly so

Generally “printing money” is used to describe situations where central banks create new money to fund government spending

1/- The correct technical term for this is “quasi fiscal activity by the central bank”

➡️ Quasi - being partly or almost
➡️ fiscal - relating to government revenue and/expenditure

Quasi-fiscal (Q-F) amount to giving govt money for free

This is not how govt must be funded

2/-

The aqueduct then meanders high up the banks of the river where it draws its water, on several sections tunnelling underground to hit that precise target of the canal height

There are many remarkable pieces of civil engineering along this route - (canal to right 1st pic)

8/- But there are other gems to see along this riverside/aqueduct route - rolling valleys with flocks of sheep, miniature waterfalls and castles

But the biggest surprise for many is a bridge named after an African icon - Nelson Mandela (the Mandela Bridge)

9/-

1. THE ZUPCO STORY - INSTITUTIONAL, BUSINESS MODEL AND MANAGEMENT FAILURES

🔥 🔥🔥

ZUPCO has been trending! I was raised on a ZUPCO livelihood. So, I thought - why not do a thread on how this organisation collapsed. And, of course why it is unlikely to recover any time soon! 2. My father was a ZUPCO bus driver for 13 years - from 1981 to 1994.

He joined when it was United Bus Services (UBS), lived through its change to Zimbabwe Omnibus Company (ZOC), and eventually to ZUPCO

He left in 1994 because he did not see any future in the organisation