Why Zimbabwe Is Fed Up With Using the U.S. Dollar: QuickTake

HARARE(Capital Markets in Africa) – A decade after Zimbabwe scrapped its own currency to end hyperinflation and began using mainly the U.S. dollar, the economy is back in free fall. Fuel, medicines and other basics are hard to come by and less than 10 percent of the workforce is formally employed. While the new currency regime initially helped stabilize prices, it also increased imports, curtailed exports and gave rise to a chronic shortage of banknotes. To fund government spending and help ease the liquidity crisis, the central bank printed bond notes theoretically pegged to the dollar, while most commercial transactions are conducted using an electronic currency known as RTGS$. This combination of parallel systems has resulted in a convoluted system of exchange rates, with consumers charged different prices depending on how they pay for purchases, and the cash scarcity has only worsened. Now President Emmerson Mnangagwa’s administration intends to introduce a new currency within a year.

How did we get here?
Zimbabwe’s woes date back to former President Robert Mugabe’s 37-year rule. Faced with possible electoral defeat, he allowed ruling party-backed militants to violently seize thousands of white-owned commercial farms starting in 2000. Agricultural exports and tax revenue collapsed, and the central bank began printiAng banknAotes to enable the government to pay its workers. Inflation skyrocketed to the point where prices were doubling every day, the economy imploded, and unemployment soared. Several currencies, including the dollar, euro and rand were adopted as legal tender in 2009, making Zimbabwe the world’s only multi-currency economy, and the bond notes were introduced in 2016. While the government insists the notes are valued on a par with the dollar, their value has plunged over the past six months. The military forced Mugabe to step down in late 2017, and he was replaced by his former deputy Mnangagwa, who has made little headway in meeting his pledge to rebuild the economy since taking office.

What’s the government planning?
That’s not yet clear. Finance Minister Mthuli Ncube says he wants a new currency introduced within a year, but he has provided scant detail as to what that would entail. While he says the central bank is building foreign reserves to back the unit, there’s no sign of that happening yet, either. Ncube is also trying to restructure billions of dollars of defaulted multilateral debts so Zimbabwe can access new international loans. As a first step toward easing the liquidity crunch, the government has said the central banks is upgrading its systems to enable companies and individuals to transfer dollars electronically. That’s currently difficult to do, and most people resort to using cash dollars and exchanging them on the black market.

What are Zimbabwe’s options?
The government could introduce a free-floating currency, which would give it greater flexibility to determine monetary policy, but it would need substantial reserves or sky-high interest rates to protect the new money’s value. The government might also have a tough time convincing citizens to accept such a currency, given how badly people were burnt when the previous Zimbabwe dollar collapsed before it was finally abolished in 2009. Zimbabwe could also peg its new currency to neighboring South Africa’s rand, possibly joining the common monetary area it shares with Namibia, Lesotho and Swaziland. While that could provide currency stability and help Zimbabwe become more competitive, it would require buy-in from the group’s members and effectively bind Zimbabwe to South African interest rate and inflation-targeting policies. Another alternative would be for the government to peg its new unit to a basket of currencies, as Botswana has done. That could provide stability, but also limit monetary and fiscal policy options.

Source: Bloomberg Business News