Why Zim is fed up with US dollar

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

Bloomberg By Mike Cohen  

February 22, 2019

[Photo added from the Internet]

A decade after Zimbabwe scrapped its own currency to tackle hyperinflation and began using instead mainly the U.S. dollar, the economy is back in free fall. Fuel and banknotes are hard to come by, less than 10 percent of the workforce is formally employed and consumers are being charged different prices depending on how they pay for purchases. President Emmerson Mnangagwa’s administration has now introduced a new financial instrument in a bid to address cash scarcity and restore normality to the currency markets.

1. What’s happened to Zimbabwe’s money?

Zimbabwe became the world’s only multi-currency economy in 2009, when it adopted the dollar, euro, South African rand and other currencies as legal tender. The new currency regime initially stabilized prices, but it also increased imports and gave rise to a chronic shortage of banknotes. To fund government spending and help ease the liquidity crisis, the central bank began printing bond notes in 2016 that were pegged, at least theoretically, to the dollar. Meanwhile, most commercial transactions are conducted electronically. The parallel systems have resulted in multiple exchange rates, while the shortage of cash has persisted.

2. How’s the government tackling the problem?

The government dropped its insistence that the bond notes and an electronic equivalent are at par with the dollar and the central bank set up an interbank foreign-exchange market to facilitate electronic trade in the securities, henceforth to be known as RTGS dollars. The move effectively devalues the bond notes, which traded at a wide discount to their dollar face value on the black market. The bank’s Governor John Mangudya says the move should eliminate the multi-pricing system and address cash shortages. Not everyone is so confident: Ex-finance minister and senior opposition leader Tendai Biti says the Zimbabwe dollar has been reintroduced through the back door. He predicts the new unit is doomed to failure because people won’t trust it and the government lacks the reserves to shore it up. The new unit began trading at 2.5 per U.S. dollar, a rate Mangudya said was agreed with commercial lenders.

3. 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 printing banknotes so the government could pay its workers. Inflation skyrocketed to the point where prices were doubling every day, and unemployment soared. 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.

4. What’s the government’s next move?

Finance Minister Mthuli Ncube ultimately intends to introduce a fully fledged new currency within a year, but has provided scant detail on what that would entail. He’s been trying to lay the ground by building up foreign reserves and restructure billions of dollars of defaulted multilateral debts so Zimbabwe can access new international loans.

5. What are the options?

The government could introduce a free-floating currency, which would give it greater flexibility to determine monetary policy. It could also peg a 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 would also limit monetary and fiscal policy options.

--With assistance from Robert Brand and Brian Latham.

To contact the reporter on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net

To contact the editors responsible for this story: Karl Maier at kmaier2@bloomberg.net, Andy Reinhardt, Antony Sguazzin

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