Re-introduction of zuim dollar will provide stimulus

Normally when Zimbabwe or any other nation has a serious problem there has to be a scapegoat or a fall guy to take all the blame for the crisis. In Zimbabwe’s case the economic decline is some how being blamed on the Zimbabwe dollar. And for that reason the Zimbabwe dollar was scraped. This argument totally misses the point that the Zimbabwe dollar previously functioned perfectly up to about 2004 .The dollar collapsed when the RBZ changed course and was transformed into a whole sale mega commercial bank and re-branded “ a developmental institution”. What was needed was to remove the person or people who caused the currency and not to remove or suspend the currency. In short this is equivalent of abandoning your house because you have just discovered that its infested with bed bugs. You don’t abandon the house you have to find ways to remove the bugs .There is need to clarify various aspects around money, inflation and economic growth .When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excessive money supply eventually leads to depreciation of the market value of all money issued. This is called inflation. If the inflation rate approaches 50% per month that’s hyper inflation which is what Zimbabwe experienced. The cause of inflation is clearly excessive money supply and printing without a matched increased production .And to tame such inflation you stop printing more money what ever in circulation can be left in circulation with its value though low it will stabilize .If the economy and other factors improve then the currency will appreciate .Zimbabwe can introduce a new currency any day. This doesn’t have to wait for any assumed formula .The assumption that there is no sufficient economic activity to hold the value is misplaced since Zimbabwe is not using the Gold Standard .The gold standard is a monetary system in which a country’s medium of exchange are currency coins and notes that are can readily be convertible into pre-set, fixed quantities of gold. The gold amount is actually available and locked in a vault or some safe place .The gold standard is not currently used by any government, having been replaced completely by fiat currency which refers to legal tender made effective currency by an Act of Government or some legal authority.Zimbabwe’s inflation was not caused by having a local currency. Zimbabwe once had a local currency which had a steady value over a long period of time. Even though it remained a soft currency it was predictable and did not collapse . It was caused by excessive printing of the Zimbabwe dollar. So inflation could have been tamed by simply stopping the excessive currency printing. This would have partially stabilized the Zimbabwe dollar even though it would have remained weak due to a precarious balance of payment position .The argument provided that the Zimbabwe dollar was worthless because it lacked something to back it up would only have been correct and accurate if Zimbabwe was sticking to the Gold standard . This practice, before World War I, had been to link it to the sum of bullion held by the treasury the so-called 'gold standard. It meant the Governments can only print enough money backed by actual /real gold reserves they held. But this was long abandoned by most countries including the USA which dumped the Gold standard around 1973 adopting the “FIAT MONEY” Money is normally defined as anything that is generally accepted as payment for goods and services and repayment of debts. This is why Zimbabwe has been operating over the last 5 or so years with no proper currency or money. Instead there was the bearer cheques .The main uses of money are as a medium of exchange, a unit of account, and a store of value. The bearer cheques were not backed by any gold or any reserves whatsoever. But still for close to 5 years they allowed trade to take place. The currency went into a free fall after it became clear that the Central Bank was now printing money and directly feeding the black market without any record or trace of how much money had been printed. Instances such as Flat Water Investments when Z$ 7.5 trillion was released to a shelf company without any proper record or legal agreement served to confirm that the Zimbabwe dollar was now a Mickey mouse currency not to be trusted.The key here is a credible record of how much currency is being printed and is it being injected into the financial system through established international standards. If the Central Bank of any country including USA decide to clandestinely print money and hap-hazardly inject that money into the financial system then that currency will join the Zimbabwe dollar in the grave yard. Note the problem is not the currency. The problem is those who manage or rather mis manage it. Its more like having some salt in your vegetables. Its healthy to have some salt but too much of it is not good or healthy. So just because somebody has put too much salt in vegetables it doesn’t mean salt is bad or vegetables are bad. it’s the same thing with the Zimbabwe dollar. People meant to safe guard the Zimbabwe dollar abused the currency, this doesn’t make the currency bad or the trouble causer. Its clear who or what the problem is.There is need to highlight that Zimbabwe like all nations was using Fiat Money .Fiat money is any money whose value is determined by legal means. The terms fiat currency and fiat money relate to types of currency or money whose usefulness results not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government's order (fiat) that it must be accepted as a means of payment. Therefore this money has not direct link with economic value. It derives its value from legal power and enforceability at law as accepted method to settle debts.Fiat money is created when a type of credit money typically notes from a central bank, such as the Federal Reserve System in the U.S.) is declared by a government act to be acceptable and officially-recognized payment for all debts, both public and private. The current unconfirmed reports claim Zimbabwe’s economy is functioning at 20% of it capacity. And Zimbabwe dollar will be re-introduced when the economy reaches around 60% of capacity . It is clear that it will take a very long time to have the economy recover without injection of out side capital. Or some form of internal stimulus supported by external funding and an improvement in sentiment and currency management.A look at the current Economic downturn will clarify the point why Zimbabwe needs the Zimbabwe dollar as a matter of urgency .There is a basic need to understand how part of an Economic Stimulus package works . In short the Government prints its own money. This money is not backed by gold or any real tangible reserve except that particular Government’s Taxing power as a way to make good of any debts created as part of the Stimulus package .Looking at the USA stimulus package will help .The American Recovery and Reinvestment Act of 2009 is an economic stimulus package enacted by the United States Congress and signed into law by President Barrack Obama on February 17, 2009. The Act of Congress was based largely on proposals made by President Obama and is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn. The measures are nominally worth $787 billion. We cant say the same about the various Quasi Fiscal Activities which were the cover up to print excessive Zimbabwe dollars. No independent body Government or private can verify how much was printed and for that reason the old Zimbabwe dollar could not be valued because for u to value something u need to know the quantity that’s available otherwise no credible valuation can be done of that currency. So the GNU needs to introduce a new Zimbabwe Dollar which is backed by credible systems in terms of how much is printed and how its injected in the system. This will assist the GNU to have some breathing space whilst long term measures are being developed and implemented. This will slowly result in that currency stabilizing and appreciating as exports pick up.What is clear from the USA Stimulus package is that its clear on several things . The amount is known, congress was involved, senate was involved, the President had to make a proposal and fight hard to have it approved .The Congressional Budget Office was involved. The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government. It is a government agency that provides economic data to Congress. The involvement of all these various entities serves to lend credibility to the whole process and the currency remains respectable as everyone knows how much was printed ,for what and how it will be injected in the financial system. A country that does not have its own currency can not effect such a stimulus package. And for this reason the recovery of the Zimbabwean economy is in fact not in the hands of Zimbabweans directly.A practical example can illustrate the effect that a re-introduced Zimbabwe Dollar will have on Government functions .Assuming the GNU re-introduces a new Zimbabwe dollar and prints sufficient quantity to pay all civil servants for a period of 6 months ( salaries paid monthly of course).These employees have some basic but critical needs that can be paid for using the re-introduced Zimbabwe dollar. Examples include payments for school fees at Government Schools,ZESA bills,ZINWA bills, City council rate bills and any other Government service including payment of income and corporate tax .This should ideally have been introduced when the GNU was sworn in. Because everyone was euphoric and hopeful the currency would have been easily accepted as people believed the GNU had potential and capacity to deliver service plus attract additional funds. Even though its late the same measure can still be taken with a bit of raising public awareness that the currency is no longer under the management of the previous individuals who molested the national currency in the name of sanctions busting .The introduction of such a stimulus package in form of currency re-introduction to pay civil servants is good policy in as far as allows the GNU to deliver service plus pay for actual work done whilst other resources are being sought. Right now it appears the game plan is limited to begging the international community. Whilst this is necessary it is critical that more dynamic options be placed on the table and be explored . The re-introduced Zimbabwe dollar to pay civil servants would then need to be properly packaged as a Stimulus package. Because it is. In the recovery of the Economy Zimbabwe Government will have to contribute something beyond the normal sloganeering. That contribution can be in the form of the Civil Service salaries package as outlined above or a modified version thereof. It definitely doesn’t help to keep going around begging without a plan to be doing something on the ground to show that Zimbabweans themselves are determined to succeed. Whilst people have a good reason to be skeptical about a local currency there is need to be able to separate the fact that the currency was sacrificed for political correctness leaving the people at the Reserve Bank who systematically destroyed the currency .These are the people who should have been suspended not the Zimbabwe dollar.Gilbert Muponda is an Entrepreneur based in Canada. He is Founder of GMRI Capital He can be reached at; Email: gilbert@gilbertmuponda.com . Skype ID: gilbert.Muponda Twitter ; http://twitter.com/gmricapital Phone: 1-416-841-5542