Howard Berlin forwarded this Forbes article on the latest Zimbabwe currency gyration. Thanks. -Editor
Until February 20th, Zimbabwe produced a quasi-currency. It was dubbed a "Zollar." On the 20th, the quasi-currency became Zimbabwe's official currency. This
new currency is called RTGS dollars and consists of bond notes and RTGS (electronic money).
The RTGS dollars possess legal tender status and will serve as the unit of account for the government's books. The official exchange rate for Zollar
quasi-currency had been set at a one-to-one rate with the U.S. dollar. But now, the RTGS dollar will trade at a managed floating exchange rate. The rate today
is 2.50 per U.S. dollar, not par, as it used to be. So, Zimbabwe's official exchange rate has experienced a maxi-devaluation of 60%.
That, however, is not the end of Zimbabwe's exchange-rate story. Zimbabwe imposes a plethora of exchange and capital controls on its citizens. Under these
exchange controls, private individuals, traders, and companies must seek permission from the government to buy, sell, and hold foreign currencies. So, neither
the old Zollar nor the new RTGS dollar is freely convertible into a foreign currency. In consequence, a black-market (read: free market) exists. Indeed,
whenever there are exchange controls and restrictions on free convertibility, black markets always appear. At present, the black-market rate is 5.75, which
represents a considerable premium over the official rate of 2.50 RTGS$/USD.
The black-market usually yields a premium over the official rate, as it does Zimbabwe. In some cases, the premiums can reach staggering levels. For example,
in 1982, Ghana's cedi carried a premium of over 2,000%. These premiums are known as black-market premiums.
The pedigree of exchange controls can be traced back to Plato, the father of statism. Inspired by Lycurgus of Sparta, Plato embraced the idea of an
inconvertible currency as a means to preserve the autonomy of the state from outside interference.
So, the temptation to turn to exchange controls in the face of disruptions caused by hot money flows is hardly new. In the modern era, Tsar Nicholas II was
the first to pioneer limitations on convertibility. In 1905, he ordered the State Bank of Russia to introduce a limited form of exchange control to discourage
speculative purchases of foreign exchange. The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required to buy
imported goods. Otherwise, foreign exchange was limited to 50,000 German marks per person. The Tsar's rationale for exchange controls was that of limiting hot
money flows, so that foreign reserves and the exchange rate could be maintained.
If Zimbabwe wants to be open for business and wants its own sound currency, it should adopt a currency board. That would make Zimbabwe's currency a clone of
the U.S. dollar, or some other suitable anchor, such as gold. A currency board would mandate that exchange controls be thrown in the dustbin. Free
convertibility would reign, and so would low inflation rates and higher asset valuations. The "open for business" sign would be the real deal.
To read the complete article, see:
Zimbabwe Introduces A New
Currency And A Maxi-Devaluation
THE BOOK BAZARRE
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