Zimbabwe’s shattered economy and massive trade deficit have caused a dollar shortage which has paralyzed the nation. The government hopes to reduce the current cash shortage by introducing the first domestic paper money since the collapse of the Zimbabwean dollar in 2009.
The public reaction was what you would expect.
The Country With No Currency…
Zimbabwe has not had its own currency since 2009. Hyperinflation in the early 2000s was caused by massive money printing by the Mugabe government to fund two wars and socialist policies that the people had been promised. By 2008, prices were accelerating at a daily pace that became impossible to track. Events culminated with an estimated 79.6 billion percent (79,600,000,000%) monthly inflation rate in November 2008. This worked out to a 98% daily inflation rate.
In January 2009, the government legalized the use of any foreign currency people could get their hands on. On April 12, 2009, the government gave up on printing its own money, and declared the US dollar the nation’s reserve currency. The public had beaten them to the punch, giving up on the Zimbabwe dollar long before the government made it official.
Or The Country With ALL The Currencies?
Today, nine foreign currencies are official legal tender in Zimbabwe: the US dollar ($), South African rand (R), euro (€), British pound (£), Australian dollar (A$), Indian rupee (₹), Botswana pula (P), Japanese yen (¥), and Chinese renminbi/yuan (Ұ) are all legal tender. Basically, any currency that a buyer and seller can agree on, can and will used in Zimbabwe.
The US dollar remains the reserve currency, with many goods and services priced in USD. Imports are also paid for mostly in dollars, but China has recently made inroads on the dollar’s supremacy in Zimbabwe.
The Chinese renminbi was added to the government’s legal tender basket after China forgave $40 million in Zimbabwean debt that it held. According to Reserve Bank of Zimbabwe Governor John Mangudya, 50% of the nation’s trade is with either China or South Africa.
The Heritage Foundation’s report on Zimbabwe sums up the economic crisis in the country:
“rampant corruption and government mismanagement have turned a once-diversified economy with well-developed infrastructure and an advanced financial sector into one of Africa’s poorest and most repressed. The lack of property rights, reflected most vividly in a land redistribution program that gutted the agricultural sector, has suppressed entrepreneurial activity.”
Zimbabwe was once a food exporter, known as the “breadbasket of Africa.” Now, it is forced to import food, thanks to corruption and a failed agricultural empowerment program. Large commercial farms were seized from the white owners and parceled out to people who had little to no knowledge of farming (or reportedly taken by political elites of the Mugabe regime).
Zimbabwe’s manufacturing and industrial sectors have likewise collapsed. The shortage of US dollars means that companies cannot import the raw materials needed for production, or the spare parts needed for machinery. Zimbabwe’s lost ability to produce most goods domestically has increased imports, adding to the dollar drain. The country’s infrastructure is literally crumbling, with rolling blackouts from its once robust electrical grid.
Coal, iron ore, gold, and platinum are Zimbabwe’s main commodity exports. All have suffered severe falls in demand and price. A government mandate that all foreign mining companies give 51% of their shares to local authorities has scared away outside investment in the mining industry.
Other commodity-dependent countries have devalued their currencies to improve competitiveness. This is an option unavailable to Zimbabwe, since it uses the US dollar.
A Dollar Mop
All of this has led to a $2.5-billion trade deficit. This is $2.5 billion in hard currency leaving Zimbabwe each year, taking away $2.5 billion in liquidity. In addition, the collapse in the value of the South African rand, once a major trade currency in Zimbabwe, has increased demand for US dollars even more. The dollar has been the best-performing currency in the world this year, leading to people from other nations traveling to Zimbabwe to buy those dollars and take them home. This further reduces the number of dollars in circulation.
In championing the idea of Zimbabwe bond notes, Finance Minister Patrick Chinamasa pointed out the difficulties dollar flight is causing the country. “For as long as we are using a currency which is appreciating when we have neighbors that have currencies which are depreciating, we become a mopping house. People come to mop up our US dollars. Any US dollars we bring, it will still vanish [as] people want USD as a store of value.” [emphasis added]
Bond Notes: Keeping The Cash In-Country
The need to combat the dollar shortage in the Zimbabwean economy has led to the plan to issue “bond notes.” The African Export-Import Bank has reportedly lent the government $200 million to back these new bond notes, which will be issued at par to the US dollar. Each bond note will be backed 100% by the Afreximbank loan. Since the bond notes will only be legal tender in Zimbabwe, it is thought that they will ease the dollar shortage plaguing the economy.
The Reserve Bank of Zimbabwe plans to issue $75 million in bond notes by the end of the year, most of which will go towards the $56 million in incentives that the nation’s exporters have accrued. The government is offering incentives from 2.5% to 5% to boost exports and get the country’s economy back on its feet.
Bond Coins Give Mugabe False Hope
One fact that initially gets overlooked when a country converts to the US dollar is the need for American coins. Commerce was being stifled due to the inability to make change. Stores used packs of gum, pens, or IOUs to make change to customers.
In what could now be considered a dress rehearsal for the new bond notes, the Mugabe government arranged a $50 million bond with the African Export-Import Bank to back the creation of “bond coins” pegged to the US dollar. Bond coins in denominations from 1 cent to 50 cents were backed 100% by this loan to be equal to US currency. The coins were minted at the South African Mint, since Zimbabwe lacked functioning coin presses.
Bond coins are still circulating, and still trading at par to the US dollar. The government was careful not to dump the entire $50 million in coins on the market at once, so that they kept their value. In fact, less than half of that amount has been issued over the last two years, to prevent devaluation.
The Zimbabwean government is hoping that the public’s acceptance of bond coins will bode well for the bond notes. This ignores a fundamental fact: accepting the risk that your spare change may devalue is far from accepting the risk that the value of your pay or savings may fall to zero.
“The Social Contract Has Broken Down”
The bond coins faced a huge backlash when they were introduced in 2014, as a sizable portion of the public believed it was a ploy by the Mugabe government to reintroduce the Zimbabwe dollar (which they could once again print to infinity). The plan to introduce new paper money has a traumatized population on the verge of panic.
Former finance minister and opposition politician Tendai Biti spoke of a “crisis of trust” between the government and a population still traumatized by the hyperinflation caused by the government from 2000 to 2009. “Despite efforts by [Zimbabwe central bank governor] Mangudya, he has not succeeded in convincing Zimbabweans that the bond notes are not another way of re-introducing the Zimbabwean dollar because they do not trust the government anymore.” Elaborating, he said, “Essentially, the social contract has broken down, and so, no matter how much they try to explain it, Zimbabweans will not accept the bond notes.”
Bond Note Blowback
Even if Zimbabwe bond notes are pegged to the dollar, the inability to use them to import food, fuel, and other goods will make then less desirable than “real” dollars. Adding insult to injury, the central bank will convert 40% of all incoming dollar revenues earned from exports into South African rands.
The Zimbabwean public is still haunted over losing its life savings to government money printing just seven years ago. The majority of people distrust the government’s promise that it will not print more than $200 million bond notes, and are causing runs on the nation’s banks as they try to withdraw US dollars. This of course exacerbates the dollar shortage.
The government claims that the Africa Export-Import Bank will “monitor” the issuance of all Zimbabwe bond notes, but fears of a government plot to reintroduce the Zimbabwe dollar reached a fever pitch on news that the International Monetary Fund has no record of Afeximbank issuing any $200 million bond to Zimbabwe.The Afreximbank has no information on its own website regarding the $200 million bond, yet has info on prior loans to Zimbabwe.
Reaction to the Zimbabwe bond notes plan have ranged from lawsuits by a former vice president to near-constant violent clashes between protesters and riot police. Opposition parties are using the unrest to push for President Mugabe to step down or be removed.
A major industry trade group has issued a blanket rejection of Zimbabwe bond notes, announcing that its members will start using the South African rand for transactions. The Confederation of Zimbabwe Industries released a press statement recommending that the bond note plan be scrapped to counter “widespread panic.” Instead, they recommended the government abandon the US dollar and the bond note plan, and embrace the rand as well.
The lack of faith in Zimbabwe’s government has extended to Europe. The German company that was supposed to print the initial batch of bond notes has dropped the contract with no public explanation.
One area that has seen a positive reaction to the whole bond note fiasco is the Zimbabwe stock market. People are rushing to get out of cash and into stocks (notably in companies that have dual listings with another exchange) in order to protect themselves against any economic shock caused by the introduction of bond notes to the Zimbabwean economy. Buying stocks in companies that are also listed with another exchange would allow Zimbabwean investors to move money out of the country while bypassing capital controls. Stocks purchased in Harare could be sold in London, for example, moving the money to safety.
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.