Meet The New Zimbabwe Dollar

May 5th, 2016 by

zimbabwe-dollarSeven years after a messy death, the Zimbabwe dollar is poised to return. The country, which uses the US dollar as legal tender, is facing a severe cash shortage. An estimated $2 billion in US currency left the country last year, causing even greater hardships for its struggling economy.

In an effort to reduce the pervasive shortage of currency in the country, the Reserve Bank of Zimbabwe announced the invention of new Zimbabwe “bond notes.” These new banknotes, printed in denominations of $2, $5, $10, and $20,  would circulate at par with the US dollar. The elephant in the room, so to speak, is whether or not they will be accepted by a populace devastated by the complete loss of their savings, the last time the Mugabe government circulated its own currency.

What Is This?

The Zimbabwe “bond dollar” is intended to relieve a shortage of US dollars which is strangling the economy. Since these new banknotes will only be legal tender in Zimbabwe, they won’t be taken out of the country. The new notes will be backed by a $200 million bond facility from the Africa Export-Import Bank, hence the name “bond notes.”

The governor of Zimbabwe’s central bank, John Mangudya, did not reveal the designs for the notes, only saying that they would be printed by a foreign company and be available in “a couple of months.”

He repeatedly stressed that this is not a first step to the return of the old Zimbabwe dollar and rampant money printing.  The government hopes that these bond notes will be accepted as a Zimbabwe version of the US dollar, since they pegged to the USD.

It is the government’s fervent desire that the bond notes will be accepted as an alternative to the US dollar, but that will require the public trust them to hold value.

What Have They Been Using?

dollar-pound-euroAfter hyperinflation destroyed the Zimbabwe dollar in 2009, the Mugabe government ruled that the US dollar, the Euro, the British pound, and the South African rand would be considered legal tender. With the arrival of large amounts of Chinese infrastructure projects and investment throughout Africa, the yuan has also seen some use in Zimbabwe.

The government prefers its citizens use the rand, since South Africa is the country’s major trading partner, but the rapid depreciation of the rand has caused it to all but disappear from commerce in Zimbabwe. Over 90% of all transactions in Zimbabwe are done using US dollars.

Why The Push For A New Zimbabwe Dollar?

Zimbabwe runs a severe trade deficit, as the domestic economy runs at a fraction of its former efficiency and commodity prices crash. Since the country uses the US dollar as legal tender, the government can’t print its way out of the problem (and a good thing, too, considering how that worked out the last time.) With so many dollars sent oversea to buy imported goods, few are left to circulate domestically. Strict limits have been put on the amount of money (dollars) you can take out of the country.

Fist of DollarsCapital flight isn’t the only drain on circulating dollars in Zimbabwe. With the drastic depreciation of the rand over the last two years, the US dollar is the only currency retaining its value. Therefore, the dollar is increasingly viewed as a safe haven asset and preservation of wealth. As central bank governor Mangudya explained when introducing the bond notes, “In the case of Zimbabwe, the dollar has become more of an asset than a medium of exchange. Unfortunately, all other nationals throughout the world are in search of the same asset.”

Will It Catch On?

The introduction of bond notes will not be a cure-all. For one, there’s really nothing stopping the Mugabe regime from printing as many bond notes as they want. Even the suspicion that this is happening will cause people to refuse to accept them. Independent economist John Robertson pointed out another strike against the new Zimbabwe dollar: shops will refuse to accept them, because they cannot be used to pay for imports to restock their shelves.

Many accuse the government of trying to reinstate the old valueless fiat currency “through the back door.” They point to the public shunning the “bond coins” introduced in 2014 for the same reasons.

The bond coins program served as a testbed for the scheme now being used for the bond notes. in 2014, Zimbabwe had an acute shortage of small change. People used packs of gum and other trifles to make change when buying or selling something.  Bond coins, minted at par to the US quarter, dime, and nickel, were introduced using the same “backing” by the Africa Ex-Im Bank. They were initially shunned by a suspicious public in favor of the South African rand. After the rand began depreciating, demand for the bond coins (which retained their peg to the dollar) overwhelmed the government. They are now the preferred medium of exchange for small transactions, with $20 million worth of coins in circulation.

The reason the bond coins became accepted was the devaluation or shortage of any alternatives. With the continued devaluation of the rand, it has all but disappeared from Zimbabwean commerce. Can the shortage of dollars entice the public to embrace the bond notes, or will macro factors that the coins did not face (like international commerce) doom this latest incarnation of the Zimbabwe dollar?

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product