DEPARTMENT OF FINANCE.

STUDENT NAME: MUCHENGETI CHIMHAMHIWA

REGISTRATION NUMBER: N0061490M

DEGREE PROGRAMME: B COM. FINANCE.

RESEACH TOPIC:

Currency Board as an ideal monetary regime to restore confidence in the

Zimbabwean economy.

PROJECT PROPOSAL
 Submitted in partial fulfillment of the Bachelor of Commerce Honors
Degree in Finance (2010)

Introduction.

There has been so much debate in Zimbabwe concerning the reintroduction of the Zimbabwe dollar.

Given the current monetary system of multiple currencies, there have been concerns raised about the

liquidity challenges being faced in the market owing to the scarcity of these foreign currencies. Proposals

have been made to bring back the Zimbabwe dollar but at the same time there has been strong opposition

since it’s considered to be destructive to the economy given the recent past of hyperinflation experienced

which brought the economy to its knees.

The thrust of this paper is to provide an insight into the best way of bringing back the Zimbabwe dollar in

a way which will consolidate the gains made so far with the multiple currency monetary system. The

author promotes the introduction of a currency board as the most suitable monetary approach to the

Zimbabwean situation that will kick start economic growth and stability needed to restore prosperity to

the economy. Also the author heavily criticizes central banking arguing that it has brought more problems

than benefits to developing countries and the adoption of currency boards is the best alternative to bring

economic growth and prosperity to developing countries.

Background to the problem.

Zimbabwe is a country which has had a devastating political and economic meltdown for more than a

decade since 1999.Agriculture was the major contributor of foreign currency earnings at that time owing

to robust commercial agriculture. But the decline in agricultural produce which followed the compulsory

land acquisition initiated by the government to correct colonial imbalances brought economic problems to

the country. The hyper inflation, unemployment, a weakening currency and negative investor confidence
which followed afterwards meant that the country was now on a free fall. Hyper inflation reached

unprecedented levels in 2008 such that the relevant authorities even suspended the calculation of inflation

figures. The currency of the country, the Zimbabwe dollar devalued and became worthless. Printing

money became the order of the day to finance ever increasing prices.

The foreign exchange market weakenened the little remains of the economy in 2008 through the so called

“burning of money” when economic agents were taking advantage of the differences between the cash

and electronic transfer exchange rates of the Zimbabwe dollar to maximize profits in the foreign exchange

market. Those who had access to the Zimbabwe dollar in bulk like bankers and senior company

executives utilized this opportunity for quick profits in hard currency. This led to the complete death of

the Zimbabwe dollar even leading to the closure of the Zimbabwe stock exchange as excessive market

indiscipline became the order of the day.

This dire economic situation was further compounded by the adverse political situation which was

obtaining in the country .Serious ideological differences which existed between the two main political

parties and the continuous confrontation they had for the whole decade worsened the situation and any

hope for economic recovery could not come without the important ingredient of political stability.

It became so obvious that sooner rather than later the relevant government authorities would officially

call off the Zimbabwe dollar in favor of foreign currencies to try to bring some relief and stability in the

market .This was mainly because the general public on its own had already dumped the local currency in

their day to day transaction in preference to foreign currencies mainly the United Sates dollar and the

South African rand.Therefore it was no longer feasible to continue advocating the use of the local

currency which had been rejected completely.

With the formation of the transitional government, the use of multiple currencies became official to try to

normalize the situation giving authorities time to come up with sound economic policies needed to

resuscitate the economy. However this is only a short term measure to stabilize the economy not a long
term solution to our economic problems. With the current monetary system of multiple currencies many

problems are still with us and a long term solution is still required.

Thus the author will investigate the possibility of a currency board as a long term monetary solution to the

Zimbabwe monetary problem. The success of currency boards in many countries which faced almost the

same economic problems as ours gives the author confidence that Zimbabwe can harness the same

economic benefits as these countries. The case of Hong Kong which still uses a currency board today and

its economic status in the world should be something of an encouragement to Zimbabwe.

Statement of the problem.

Our country finds itself at cross roads and without a way forward in as far as the best way to bring back

our own currency is concerned. All stakeholders agree that at one point in time we will need to have our

own Zimbabwean currency back in the economy but however currently there is no clearly agreed way of

best bringing it back. An approach is needed to bring back our local currency in such a way that it will

consolidate the economic gains which have been made with the current monetary system of multiple

currencies. That’s the problem we currently have which the author want to investigate and perhaps come

with one among the possible solutions which can be implemented.

Objectives of the study.

The economic and political decay which happened in Zimbabwe since the year 2000 caused much pain

and suffering to the inhabitants of the country. That scenario cannot by any means be allowed to repeat

itself again. Thus our country need to have a monetary system which restores the lost economic

confidence to enable it to emerge out of this economic crisis. Thus the objective of this study seeks

among other things to:

a) Find out whether the current system of multiple currencies is the best for the economy according

to the transacting economic agents.

 b) Seek if economic agents still believe in central banking as the desired monetary approach for the

country.

c) Get a view of what economic agents consider to be the best alternative monetary approach if not

satisfied with central banking and whether a currency board can be an ideal alternative.

Statement of Hypotheses.

The current system of multiple currencies is a stop gap measure which was meant to stabilize the

economy but cannot be a long term solution to Zimbabwe currency problem.

Central banking is not the best monetary approach for developing countries for it has brought fewer

benefits and more hurdles in their economies and an alternative approach is required.

Developing a more comprehensive monetary system for Zimbabwe will bring more economic benefits to

the country than the current system of multicurrencies.

Currency board is the most appropriate monetary arrangement needed to instill discipline in the

Zimbabwean monetary system necessary to restore confidence.

Significance of study.

Currency board is a proven monetary system which has helped countries that faced an economic collapse

recovers. The monetary discipline it instill in the economy if properly followed will accrue the much

needed economic benefits to our Zimbabwean economy. The public need to transact with a currency they

have confidence in which boosts economic innovation and creativity and with a sound currency board all

benefits will flow to our economy. What is needed in our economy is a disciplined, predictable and

consistent monetary system. And with a currency board this possibility can be achieved and thus it’s

worthwhile to undertake this research.

Preliminary literature review.

A currency board is an institution that issues notes and coins convertible on demand at a fixed rate into an

external reserve asset, such as a foreign currency which is strong and relatively stable. External reserves

equal 100 percent of the currency board's notes and coins in circulation. Currency board is a well known

monetary arrangement which has been used in more than 70 countries and which enjoyed much use

before the final breakup of the Bretton Woods monetary system in 1973.During the Bretton Woods

system and the "classical," pre-1914 gold standard, and to a lesser extent also between the world wars,

developing countries and developed countries alike generally had sound currencies. A sound currency is

one that is stable, credible, and fully convertible.

Zimbabwe established the Southern Rhodesia Currency Board in 1940 and the Central Africa Currency

Board in 1954 with representation from Malawi, Zambia and Zimbabwe and it served these countries

‘economies well with a strong currency (S. Hanke 2008). Today, most developed countries still have

currencies that are sound, if not as stable as under the gold standard. Most developing countries, in

contrast, have unsound currencies (Schuler 1996). The loss of sound currencies is connected to the rise of

central banking in developing countries. During most of period before the final breakup of the Bretton

Woods system, most developing countries did not have modern-style central banks. Instead, they had

competitive issue of notes by privately owned commercial banks (in Latin America, East Asia, and self-

governing British colonies), monopoly issue of notes by a privately owned commercial bank (in the

colonies of European powers other than Britain) or currency boards (in most non-self-governing British

colonies and some independent nations) (Conant 1969 [1927], Schuler 1992a, b). Central banking is a

recent arrival in most developing countries. It did not become widespread in Latin America until the

1920s, and did not become widespread in Africa, the Middle East, and Southeast Asia until the 1950s.

Typically, within a decade of establishing a central bank, developing countries experienced higher

inflation and more restricted convertibility than previously.

The high inflation and limited convertibility characteristic of unsound currencies have hindered the

economic development of developing countries. Unsound currencies discourage domestic and foreign
investment alike. A number of developing countries that had net inflows of capital under colonial rule and

during the first years of independence, when they had sound currencies, became net exporters of capital

after their currencies became unsound, as foreign capital dried up and domestic capital illegally fled to

avoid confiscation by means of inflation. Consequently, economic development slowed, stagnated, and in

some cases even reversed. Historical experience suggests that to attract renewed capital investment and

encourage renewed economic development, developing countries need sound currencies. Also, historical

experience also suggests that central banking has little likelihood of providing sound currencies soon in

most developing countries.

Of rival systems to central banking, the currency board system was especially widespread. Currency

board systems continue to exist in some countries, most notably Hong Kong and Singapore. Since 1991

Argentina and a few other countries have also established currency board-like systems that have some but

not all features of orthodox currency boards. The common trends among all countries which have used

currency boards were as a result of economic declines which happened in those countries. They adopted

this monetary system with the required discipline needed to resuscitate their economies. And in most

cases in which the system was adopted it succeeded resoundingly with those countries enjoying sound

economic growth.

Given the less prudent central banking practice experienced in Zimbabwe and the devastating

hyperinflation and unemployment which followed, it’s high time the country choose an alternative

monetary system. One which compels discipline and strictness to achieve an economic turnaround.

In this regard the author proposes a currency board as monetary alternative which fits the Zimbabwean

scenario which if properly implemented and managed will enable the country to quicken its economic

restoration and the realization of economic confidence, growth and development.

Data and Methodology.

Sample Design: Representatives from major economic sectors.

The research focuses on views of represantives from various sectors of the economy on the introduction

of a currency board such as financial services, production, retail, agriculture, mining, tourism and the

general public. The key is to have a sample design which is truly representative of the population. Money

is used by everyone in Zimbabwe thus a design which incorporates all sectors of the economy will be

used to get people’s views. In addition the design only incorporates people who are knowledgeable

enough to know what a currency board is and as such the same people would be included in sample.

Sampling.

The researcher understand that his chosen topic is one where elements to be included in the sample should

be knowledgeable and know the subject matter of currency boards. In order to have a sample which is

truly representative of the population the researcher will use judgmental sampling, which according to

Sekaran (2000), is a purposive, non-probability sampling design in which the sample subject is

chosen on the basis of the individual’s ability to provide the type of special information that the

researcher is seeking to find. Since the study aims to investigate the possibility of introducing a

currency board as an alternative monetary system, the researcher shall choose officials who are

well acquainted with the operations of currency board especially in the financial services sector

in his sample.

Research Instruments.

(a)Primary Data

The researcher will use questionnaires, interviews and telephone to gather data. Focus will be mainly on

questionnaires as an effective method since respondents can have adequate time to analyse the questions

and give their honest responses. Also since respondents have to complete the questions on the

questionnaire it enable the researcher to analyse accurate data as what people say not what the researcher

think or want. Possible weakness to this research instrument is that some respondents may not sent back
 the questionnaires due to failure to complete them .To address this the research questions will be made

shorter and to the point so that it will be easy for the respondent to give his/her views honestly and

quickly. Interviews and telephone calls will be used as additional tools where questionnaires fail.

(b) Secondary Data

Desk research shall be done through the use of secondary sources of data and in essence guided

by the research questions. Published books on currency boards, journals on currency board

performance and other publications shall be used to gather the data. Other sources of secondary

data would include the press and the internet.

Work Plan and Budget

CHARTERS CONTENT EXPECTED MONTH EXPECTED

COST(USD$)/CHAPTER

1 Introductory January 5

2 Literature Review February 8

3 Research Methodology March 30

4 Evaluation of Findings April 12

5 Summary and Conclusions April 5

6 Presentation and Submission May 30

BIBLIOGRAPHY AND REFERENCES.

S H Hanke. (2008) ,How to Kill Inflation in Zimbabwe,Research paper.

S H Hanke,K Schuler (1994),Currency Board for Developing Countries, ICS press

Tan Pin Neo, Maggie (ed.) (1997), Currency Board System: A Stop-Gap Measure or a Necessity.
Currency Board System Symposium '97, Singapore: Board of Commissioners of Currency
Singapore.

Taylor, Dean (1982) "Official intervention in the foreign exchange market, or, bet against the
central bank," Journal of Political Economy, 90, 2, April: 356-68.

U Sekaran. (2000), Research Methods for Business, A Skill-Building Approach, 3rd Ed, John Wiley &

Sons, Singapore

Vaubel, Roland (1978) Strategies for Currency Unification: The Economics of Currency
Competition and the Case for a European Parallel Currency, Kieler Studien 156, Tübingen: J. C.
B. Mohr (Paul Siebeck).