Zim currency: a necessary bitter pill

ZIMBABWE’S central bank governor must be a very anxious man as the end of the month hurtles ever closer. He has every reason to be. As if by lot, it will be Dr John Mangudya’s unenviable task to add a new, unpopular local currency called the “bond note” to the extant multicurrency regime at the end of October. That’s about two weeks away.

The Reserve Bank chief worries about resistance and possible rejection of the imminent currency because Zimbabweans want to know first what the bond note will mean for their American dollar holdings in the banks which they are failing to withdraw, and also about what government plans to do or achieve with the introduction of the new currency. It is a combination of mistrust and suspicion. Only the government seems confident of the new currency, which it sees as a possible if partial remedy for a liquidity crunch which has ravaged the country’s economy since early this year. Speaking soon after the opening of the National Assembly (Parliament) by President Robert Mugabe last week, Vice President Emmerson Mnangagwa said the new currency was necessary to oil the operations of the financial services sector.

He said of the bond note: “We are going to live with it. Those who can easily realise that reality should begin to accept that the bond notes will be with us. We are in the middle of crafting legislation to introduce the bond notes.”

The Vice President indicated the US dollar and British pound were being used cheaply to buy local products yet they were scarce in the financial system. “The current financial services sector in the country,” he said, “is constrained by the fact that the legal tender of the country is anchored on currencies that we have no control over. We need a mode of transaction which we can control in the country on the basis of security provided by the Afreximbank US$200 million (loan facility).”

Like most policy initiatives by the government in Zimbabwe, the introduction of the bond notes is mired in politics, and a bit of past experience when the Zimbabwe dollar was rendered worthless by runaway inflation between 2007 and 2008. The country was forced to adopt a multicurrency system whose main anchor in the US dollar. Now Zimbabweans take the American currency as their own, and are suspicious of any talk of a local currency.

Opposition political parties and civic society have launched a sustained campaign on social media and the local private press to discredit the bond notes. They accuse government of trying to surreptitiously bring back the demonetised Zimbabwe dollar by another name, and some have lost court challenges in the Constitutional Court fighting to stop the introduction of the new currency.

Then there are economists and analysts who, instead of working on the mechanics of how the bond notes can be made to work, don’t miss an opportunity to stoke the fears of a nervous public by reminding them that no country in history has dollarized and then managed to re-introduce its own currency. In other words it is impossible to make another Zimbabwe currency work so we should stick to the US dollar, or at the very least, join the South African Rand Union which also has Namibia, Swaziland and Lesotho. The problem is that while the business sector and banks are sceptical of and uneasy about the bond note, they have failed to demonstrate that they have the capacity or willingness to join government in the fight to stop illicit outflows of American dollars. Together with imports of cheap commodities, externalization of foreign currency has so far driven Zimbabwe’s trade deficit to more than US$2,5 billion, and is growing.

Besides political considerations like sovereignty, government has valid reasons for wanting a currency over which it has “control”. The American currency has reportedly appreciated at its fastest in the past 40 years. That makes Zimbabwean exports uncompetitive in the region. Instead Zimbabwe’s neighbours have turned the country into a dumping ground where they can easily mop up foreign currency. The stronger US dollar has also whetted Zimbabwean’s appetite for foreign goods. It’s unsustainable and detrimental to the economy.

No doubt as the end of October appears to rush at us like a train, nobody wants to be in Reserve Bank governor Dr Mangudya’s shoes. He has set a high stake, hinting he might quit if the bond note is completely rejected. Uneasy lies the head that wears a crown.

October 2016
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