Currency conundrums in Zimbabwe

HARARE (Capital Markets in Africa) – Zimbabwe abandoned the use of its own currency, the Zimbabwe dollar, in February 2009 and adopted a multi-currency regime. The demise of the Zimbabwe dollar was not mourned. By the time it was phased out it had lost all credibility as a medium of exchange, after years of hyperinflation running to many million percent.

While the multi-currency regime legalised the use in Zimbabwe of a number of currencies, among them the US dollar, euro, pound sterling, Botswana pula and South African rand, it has been the US dollar which has been adopted as the currency of account. US dollar notes are the principal currency in circulation. Inflation in Zimbabwe ceased to be a factor. The contrast to the economic mayhem of the Zimbabwe dollar days could not have been more stark.

However this optimism waned following the end of the government of national unity in 2013. Strident government rhetoric concerning its indigenisation policy, coupled with an extraordinary degree of confusion around the implementation of that policy, has proved a powerful deterrent to direct foreign investment. Zimbabwe’s balance of payments deficit has remained substantial, with no sign of balance of payments support being available in the immediate future.  The situation has not been helped by the need to finance grain imports following a poor farming season, together with the requirement to pay for electricity imports.

All of this has prompted moves by the authorities to strictly limit access to the country’s export proceeds. Exchange controls have been reinstated, and remittances are now tightly controlled under a list of priorities which has been drawn up.

In parallel the country has in the last half year been experiencing ever increasing US dollar cash shortages. This has been caused by the difficulties experienced by local banks in financing the importation of cash because of limited funding of their offshore nostro accounts; and by the fact that US dollar notes have a tendency to leave the country, particularly in times of economic uncertainty. Government has been talking about easing the cash shortage by introducing “bond notes”, having parity with the US dollar. This in turn has triggered in the public unpleasant memories of the defunct Zimbabwe dollar, and a desire to withdraw US dollar notes from the bank when possible, with a resultant worsening of the already existing cash shortage.

No legislative framework has yet been put in place to accommodate bond notes as a currency of exchange. Watch this space to see whether this happens; and indeed whether there will be meaningful engagement with the IMF to secure some form of support, and a serious attempt to create a truly investor-friendly environment.