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Concrete solution for the currency crisis of Zimbabwe

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    Introduction

    Zimbabwe was once a very prosperous nation after gaining its independence from the Great Britain in 1980.The country is currently in its worst economic state with its people in dire need for money, food, medicine and other basic commodities. The rate of inflation is currently the highest in the world, spiraling to as high as over 231million percent. Due to this worse state of economy most Zimbabweans depend on their friends and families abroad for their upkeep and survival is through a single meal per day.

    The economic crisis is blamed on the sitting president Robert Mugabe, who is criticized for his land distribution policies that lead to the eviction of the white farmers from their farms and their occupation by blacks who had no ability to manage them effectively causing serious food shortages. Unbudgeted veteran payments of large amount of public money through corrupt means deepened the economic crisis further increasing the inflation rates[1].

    The education system has not been spared either, economic crisis have lead to decreased quality of education. Zimbabwe has poor learning conditions; there is lack of transport and external donations that supported international and university academics.

    The Zimbabwe’s government position is that the economic crisis is a result of drought and economic sabotage by countries they perceive as their enemies such as the International Monetary Fund, the British government, and an international gay conspiracy. But these claims have no credible explanation of the deep rooted crisis.

    Incase urgent measures are not taken every economic indicator suggests that inflation can still get worse. The Zimbabwe’s economic down turn is being felt by every one, in the street corner, homes and business. The country is in a deep economic recession and hyperinflation for the last decade. The countries unemployment rate is the highest in the world standing at 80%.

    The government is not fully decided between an interventionist approach, the command control policy approach or even a free market approach to save the economic. The control measures to check on inflation have been tried such as floating of exchange rates and the price controls in an attempt to increase money supply but the desired outcome has never been arrived at.

    The truth of the matter is that Zimbabwe has more of a governance problem than what is being perceived as an economic problem, so to solve the economic crisis affecting the country the governance crisis should be given the first priority and the economic crisis will get its solution with much more easily[2].

    Inflation witnessed is mainly man-made since during the recent presidential elections inflation had dropped significantly since lots of money was provided to finance the election. The depreciation of the Zimbabwe dollar on the exchange markets is one of the leading causes of inflation. Lack of exports from companies and low industry utilization is also to blame for the deepened economic crisis.

    To effectively handle the economic crisis the government requires a financial architecture and policies capable of identifying and addressing the core causes of the governance crisis which will in turn bring an end to the economic crisis.

    Solution for the currency crisis of Zimbabwe

    1.                 Switch to an established currency

    Currency substitution is the process of shifting from domestic money system to foreign money which is an effective way of avoiding inflation and solving the economic crisis facing them. But at the same time it results in the loss of seignorage for the affected country.

    The currency crisis affecting Zimbabwe requires urgent monetary reforms that are being discussed. They include the Randization (adopting the South African Rand), an ordinary peg to a basket of currencies and a domestic currency fully supported by foreign reserves.

    A proposal to adopt the South African Rand was suggested by the former president Mr motlanthe but the Zimbabwe’s Finance Minister opposed its implementation. The Rand is one of the strongest African currencies and if adopted Zimbabwe will be able to compete with other countries and its economy will stabilise due to the Rands stability. The proposal was that for each South African citizen 1000 Rands in circulation the same should be introduced in Zimbabwe which means that a total of 11 billion Rand is required to solve the crisis[3]. This solution is better than having a crippled central bank although it requires dismantling the Zimbabwe’s central banks issuing function. Money issuance will require the approval of South Africa and this will make Zimbabwe get the recognition it requires without depending on foreign reserves and aid.

    The idea is receiving opposition from other partners in the common Monetary Area which propose that South Africa should lend a reconstruction loan to Zimbabwe rather than adopting the Rand. They view that Randization will destabilize the regions currency arrangement.

    Adopting the peg to a basket of currencies coupled with a Zimbabwe Reserve Bank is the most possible and feasible solution to the financial crisis. The plan requires less policy reforms and does not require huge foreign reserves to sustain and maintain. The only problem with this proposal is whether the people and foreign investors will have the confidence with Zimbabwean institutions to effectively implement and sustain the peg.
    The crisis can be dealt with by setting up a currency board or “dollarization” associated with US scholar Steve Hanke. This proposal may be difficult to implement because both sides require fiscal stability, openness to trade and even capital flow, a flexible market and trust from the ordinary Zimbabwean citizen.

    The biggest challenge to this proposal is that the Zimbabwe reserves are too small to support the market and that massive foreign capital should be injected from the donor community for the plan to succeed. The Zimbabwe Reserve Bank should also be let free from political interference so as to work in amore open and transparent manner.

    Finally the government should keep away from printing money to meet its budget deficits for both the peg and introduction of the rand to succeed. The peg is a more feasible plan for the current economic crisis rocking Zimbabwe[4].

    2. Unaffected by inflation spiral

    Any monetary plan and policy should be crafted and implemented in a way that it addresses the hyperinflation in Zimbabwe and at the same time appreciating the policies in the market in the short term.

    All Zimbabweans and the external community can be made to work together to stabilize economic programmes that can reverse the current economic challenges mainly in the inflation scourge. Previous attempts to tame inflation did not yield the expected results thus strong and concrete measures need to be considered to the inflation spiral to be brought under control.

     Before monetary policies are implemented, previous policies need to be examined whether they succeeded and the cost of such measures to the economy, particularly on inflation, market confidence and even foreign money generation.

    The current monetary problems are due to failed stabilization strategies that were taken in the past; however market confidence can be restored if current proposed packages are good enough.

    3. The market will set the prices.

    The stock markets are very fundamental in controlling inflation in Zimbabwe. If the stocks are on an upward trend the market forces tend to ensure that there is circulation of money in the market which lowers the inflation levels.

    The upward trend of high performing stock markets mainly in industrial and mining indices has triggered room for the small and medium shares to register some significant upward trend in the later days with strong indications of a bullish trend ahead. The government should thus support the stock market as a means of ensuring that the stock market becomes more active. This will raise the amount of money in circulation within the citizens and even help in returning back the billions of Zimbabwe’s money banked in foreign banks hence reducing inflation levels.

    The government should reconsider its decision to return farms to white farmers who were supporting and providing food for the nation. Their eviction from the farms and subdividing the farms to the blacks who have no experience on large scale farming lead to acute food shortage that is currently the biggest challenge to the government since most of its people are starving and living on a single meal a day. The food scarcity has lead to inflation spiral up very fast. If the political class can be realistic and solve the land issue, then the food insecurity problem could be solved[5].

    Conclusions

    The financial crisis in Zimbabwe is purely influenced by the political volatility of the country; the two are much related and affect each other directly. The markets as well are determined by the financial crisis in a given country. Zimbabwe in this case has faired on badly in all aspects that determine a strong financial background, and it is for this reason why inflation has been very high to value that make be referred to as hyperinflation.

    To effectively deal with the crisis the political class must take extra-ordinary measures such as adopting a foreign currency o replace their weak dollar so that they get cover from any world financial crisis like the current global melt down being experienced across the whole world. The white settlers who used control the agricultural sector by providing sufficient food for the whole nation should be given back their land and fully supported to plant food crops in a bind to food production.

    Bibliography

    Calvo, GA., & Carlos AV, Currency Substitution in Developing Countries. Working Paper no, 92/40, International Monetary Fund (June) 1992.

    <http://www.thezimbabwetimes.com/?p=405>

    http://www.britannica.com/EBchecked/topic/657149/Zimbabwe/278299/Economic-crisis

    (Calvo, & Carlos, 1992)

    [1] <http://www.thezimbabwetimes.com/?p=405>

    [2]Calvo, GA., & Carlos AV, Currency Substitution in Developing Countries. Working Paper no, 92/40, International Monetary Fund (June) 1992.

    [3] http://www.britannica.com/EBchecked/topic/657149/Zimbabwe/278299/Economic-crisis

    [4]Calvo, GA., & Carlos AV, Currency Substitution in Developing Countries. Working Paper no, 92/40, International Monetary Fund (June) 1992.

    [5] <http://www.thezimbabwetimes.com/?p=405>

     

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