US based Professor of Applied Economics at Johns Hopkins University Steve Hanke has called for the disbandment of the Reserve Bank of Zimbabwe saying it has failed to stabilize the country’s currency.
Harare has just launched a new currency, Zimbabwe Gold or ZiG-the sixth attempt in the last decade to de-dollarize. However, a bullish Reserve Bank of Zimbabwe chief John Mushayavanhu says the new currency backed by gold, foreign currencies and other minerals will be a success and will “silence all the doubting Thomases”. Hanke maintains ZiG is dead on arrival.
Voice of America’s Zimbabwe reporter Blessing Zulu (BZ) spoke with Professor Hanke (SH) about the Zimbabwe Gold.
BZ: Professor Hanke, what is your take on this new Zimbabwe Gold currency - ZiG?
SH: I think it’s another joke. That's my take. It's going to fail like all the other schemes that the government has come up with. And one reason for that is this, no one really has any trust in the government. If you're issuing a currency, you have to have some trust. I'm not saying a lot. But you have to have some trust. I think the level of trust in the Zimbabwe government is almost zero.
BZ: But how about their assurance that this currency will be backed by gold?
SH: The currency is a joke, and that promise is a joke, too. Zimbabwe suffers from something called anomie, and that is no matter what the law is or the rules they aren't followed. No one follows the law, so, the law behind the ZiGs says that it's backed by gold, but no one will follow that law. And one reason they won't follow it is that they don't have the gold to back it up. Where is the gold?
BZ: Well, they told the nation that there is a gold vault at the central bank, with just over one tonne, and 1,5 tonnes offshore and some foreign currency reserves, all totaling US$300 million. How much, really, is needed in terms of reserves by a country like Zimbabwe to have a stable currency?
SH: It's really impossible to know because it depends on how many units of the ZiG that they issue. If they issued zero ZiGs, they'd have to have zero gold backing. You see what I mean? It's a function of how many units of the currency they're issuing. The only hope for Zimbabwe is to fully dollarize and get rid of the central bank. They have to really get rid of the central bank completely. And until they get rid of the central bank and dollarize, nothing good is going to happen with regard to the currency in Zimbabwe. As you know, I've been studying this for years and I've been doing this kind of work all over the world. So I've seen a lot of currencies and I've done a lot of currency reforms. I've stopped a lot of hyperinflations. And that's one reason that I'm referred to as “The Money Doctor”. The “Money Doctor” says the new ZiG is already on its deathbed before it even starts. No, no one believes anything that the government is saying about currency and that's why I said it's kind of a joke. Zimbabwe has become a joke.
BZ: So, in the absence of a central bank what other options are there? may you explain.
SH: I think that's the only option that would work in Zimbabwe because of this anomie problem and the fact that they don't follow any laws even their own laws, they don't follow. And I think the only possibility is to get rid of the central bank and dollarize. You did have a spell of dollarization that worked very well, but the problem was you did have the central bank. And the dollarization came to an end. Why? Because you had a central bank that was able to step in. And it's been a complete disaster after the dollarization was dropped, after official dollarization. I mean, Zimbabwe is very dollarized defacto, anyway.
But when it was dejure, the system worked well. Biti (Tendai) was the finance minister. Things were under control or more or less. For Zimbabwe, they did very well during that dollarization, official dollarization period. And then they started experimenting with different kinds of money. And the reason that they did that is they use it as a way to tax Zimbabweans with the inflation tax. So, the government lives off two things in Zimbabwe, the inflation tax and exploiting miners. So that that's one reason we know the ZiG will be unsound, it will allow the country to inflate in tax. And the other tax is that the government is basically stealing from the miners. Natural resources are taxed one way or another. And that's how the government lives. Two sources of revenue. Theft from the miners and number two, the inflation tax.
BZ: Lets step back a little, if Harare gets rid of the central bank, can they replace it with say a currency board?
SH: No, a currency board will not work in Zimbabwe. I originally, in my book that I wrote on Zimbabwe, “Zimbabwe, Hyperinflation to Growth” was the name of the book, was published in Harare. Alright. I recommended the following options. One was the currency board and two was dollarization. Now I’ve changed my opinion given the recent history since the hyperinflation, that book was written right before the hyperinflation. And, I changed my mind about the feasibility of a currency board, because to have a currency board you have to follow the rule of law and they don't follow the law and anomie is the enemy of something like a currency board. So, I would not recommend a currency board. You have no monetary institution. The government should have nothing to do, nothing to do with currency in Zimbabwe. You must get rid of the Reserve Bank and fully officially dollarize.
BZ: But the new central bank chief John Mushayavanhu says he sees this new currency ending market volatility. Your take?
SH: Again, do you really believe the new governor? No one does. We've heard them saying this song forever in Zimbabwe. It's really a joke, at this point it's embarrassing.
BZ: So how many months are you giving this new currency before it tanks or battered by depreciation?
SH: Oh, I think it'll start being eroded immediately. The ZiG will zag immediately.
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