- The United States dollar is now legal tender in Zimbabwe after the finance minister announced measures to stabilize the economy in June
- The central bank of Zimbabwe introduced gold coins to shore up the value of the local currency
- Inflation has been a nagging problem in Zimbabwe for the last 25 years
The pin finally dropped in Harare.
For years the monetary authorities of Zimbabwe had adamantly pursued a de-dollarization policy. The country’s government reintroduced the local currency in 2019 after a decade of using a basket of multiple currencies led by the United States dollar.
Zimbabwe initially abandoned the use of its local currency, the Zimbabwe dollar, in 2009 after its value was destroyed by the highest levels of inflation ever on record and for a country in peacetime or not involved in armed conflict. The reintroduction of the Zimbabwe dollar this time around, dubbed the ZWL$, was brought about by a biting shortage of hard currency, which saw United States dollar bank notes disappear from the country from 2016 to 2020.
In Zimbabwe, issues like currency are a matter of national pride much more than they are about economic fundamentals. The local currency was introduced without the necessary conditions precedent for it to be successfully deployed. For starters, the macroeconomic fundamentals necessary for introducing a local currency are just not there.
There is an obstinate lack of confidence by the public in Zimbabwe in the economy, the local currency, and a deep-seated suspicion of the government. This has been a matter of great frustration for Oxford-trained minister of finance Professor Mthuli Ncube.
The country’s treasury boss has repeatedly mentioned that there are no reasons for the country’s ailing currency to remain in the free-falling trajectory that it is in. The minister has referred to the country’s trade and fiscal surpluses. The trade surplus, for one, is a veritable fact.
According to the last monetary policy statement by the Reserve Bank Governor of Zimbabwe, Zimbabwe achieved a trade surplus and earned the largest amount of foreign exchange in history. It surpassed its previous all-time high record, which was achieved in 2013. So in the government’s mind, the local currency should hold its ground against major currencies, chief among them the United States dollar and the South African rand, whose issuing country happens to be Zimbabwe’s biggest trading partner.
Another of the finance minister’s favourites is the reference to Zimbabwe’s foreign exchange reserves which at this point comprise largely if not entirely of the Special Drawing Rights (SDR) awarded to the country in 2021 by the International Monetary Fund (IMF) as part of the multilateral financial institution’s effort to aid economies of the world to recover from the economic effects of the Covid pandemic. It is inconceivable that Zimbabwe’s currency could keep losing ground against other currencies despite these “fundamentals”.
Zimbabwe’s economic and currency woes run much deeper than the finance minister can allude to. For starters, the country heavily relies on imports; it produces little in the form of manufactured goods for exports. This means that the country’s means of generating income in the form of foreign exchange consist largely of producing and selling raw goods with no value addition.
This phenomenon constrains the country’s ability to generate the foreign exchange it is in desperate need of to help underscore the value of its currency. This is perhaps the biggest stumbling block to the universal adoption and warm reception of the Zimbabwe dollar.
Zimbabwe’s citizens have had unpleasant experiences with the Zimbabwe dollar even before it collapsed in 2009. The country’s citizens have seen numerous bank failures with their savings and receiving no compensation for their losses. This was in 2004 when the banking crisis claimed the scalps of all but a handful of local/indigenous banks. In 2006 the central bank raided the foreign currency accounts of the largest exporters in the country. The foreign exchange, it is said, was used to finance the government and political expenditures.
The currency went on to collapse after breaking world inflation records. It then came back onto the economic scene in 2016 when a shortage of hard currency prompted the government to introduce what was then known as a surrogate currency, the “bond note”.
It was never a popular move on the part of the government. The public resisted it. The people called the bond notes a back door reintroduction of the dreaded Zimbabwe dollar. The bond notes were said to be at par with the Greenback. The basis for this assertion was that the notes were backed by a US$150 million loan from an African-based multilateral financial instruction.
No sooner had a local currency returned than inflation began to run rampant.
- Inflation has emerged from what the government of Zimbabwe terms “quasi-fiscal” spending, which is off-budget expenditures
- Dollarisation or the official use of the United States dollar, has mitigated the effect of inflation historically in Zimbabwe and is expected to result in stability going forward
- Government has in the past resisted any efforts to adopt the use of multi-currencies in Zimbabwe but has gone on to make an about turn and adopt the United States dollar
- Businesses and households in Zimbabwe now openly require United States dollars for certain goods and services
The government then banned the use of multiple currencies and legalised the Zimbabwe dollar as the sole legal tender and medium of exchange. Interestingly because of the lack of macroeconomic fundamentals, the economy of Zimbabwe automatically dollarises by itself. How so? It goes back to the earlier assertion: the country still relies heavily on imports while producing little. This, coupled with the fact that the economy, for the most part, is informalised, means that economic agents, households, and firms are more inclined to offer their goods and services for hard currency than they would for the local currency, who’s rapidly depreciating value poses the risk of financial loss should they opt to transact business in Zimbabwe dollars.
The desire to keep the Zimbabwe dollar in circulation and alive has caused the government to resort to measures that could be called extreme in different circles. In May 2022, the president of the country, Emmerson Mnangagwa, appeared on state television to announce a “raft of measures” designed to stabilise the economy. They included a ban on bank lending, a ban on international payments to third-party suppliers and an increase in taxes for participants in the local stock market. These had the effect of further undermining confidence in the economy, unfortunately. Recently government hiked interest rates to 200%. By any measure, this is an aggressive policy position.
Theoretically, other countries use a conventional method of dealing with rising inflation. Interest rates are an effective tool any central banker has in their arsenal.
Such a hike may very well achieve its intended purpose; however, it will not be without economic pain in this instance. The country will have to revise its earlier growth projections of about 7-8% downwards. The IMF had predicted a growth rate of between 3-5% in any case. The interest rate hike is flawed in that it presupposes that the reason for Zimbabwe’s stubborn inflation is excessive money supply and that economic agents are using this excessive money supply to speculate in the economy by borrowing cheap money and deploying it in investments and ventures which are then driving inflationary pressure.
There would be merit in this case if Zimbabwe did not already have some of the highest interest rates of any country anywhere. Before the interest rate hike to 200%, Zimbabwe’s interest rates were around 60% per annum which is very high compared to not only the country’s neighbours and other countries in the world. This latest hike has seen the debts of households and firms ballooning and, in the process, increasing the risk of financial distress and the rate of non-performing loans on the books of commercial banks.
Most interestingly, the government has introduced gold coins to the market. The central bank is minting gold coins which have been named “Mosi Oua Tunya”, this is the native name of Victoria Falls, and perhaps in a very telling and indicative irony “Mosi Oua Tunya” is also the name of a locally produced brand of cigars…
Will the gold coins achieve their intended purpose, or will they go up in smoke?