Zimbabwe’s currency crisis

Members of the Zimbabwe ruling party’s decision making body told Bloomberg in April 2014 that Zimbabwe is considering the reintroduction of the Zimbabwe dollar as it struggles to meet its monthly wage bill.

In May Zimbabwe’s Treasury postponed the pay dates for its 230 000 public workers the second time in two consecutive months, after having awarded civil servants a 23% increase in April to honour a 2013 election promise made by President Robert Mugabe and the Zanu PF.  The rise resulted in an increase in the wage bill from USD100 million to USD150 million, while government wages have already been consuming 75% of State Revenue in 2013 as compared to an IMF recommended average of 40%.

MDC-T shadow minister of finance Tendai Biti predicted earlier this year that “the return of the Zimbabwe dollar is not a question of if, but when” as the government may be forced to reintroduce the Zimbabwe dollar in a desperate attempt to expunge growing domestic debt and manage its wage bill.  He said the Zanu PF government will have to print money to monetize the deficit they have been creating, but warned that the reintroduction of the Zimbabwe dollar will result in economic stagnation for 15 years.  The economy is already suffering from huge capital and current account deficits and deindustrialisation.

Certain of the Zanu PF’s politburo members, however, seems to be concerned that, while the revival of the Zimbabwe dollar would allow the government to print money to meet its needs, it would damage the popularity of the president and the party.

Zimbabwe abolished its national currency in 2009 after, according to International Monetary Fund estimates, inflation surged to 500 billion percent in 2008 and the Zanu PF lost its parliamentary majority.  The country is currently operating a multiple currency system, with the USD being the predominant currency.  Although it does not have an official agreement with the United States Federal Reserve to use its currency, the Government conducts all its business using the USD.

Rumours of the reintroduction of the Zim Dollar have surfaced on a number of occasions over the last five years.  In each instance some investors with funds in financial institutions immediately withdrew their funds, fearing that funds held in foreign currency would be expropriated and compensated in Zimbabwean dollars.  The currency rumours and potential economic instability and uncertainty have also been deterring foreign investors.

It is generally agreed that the multi-currency system used in Zimbabwe has served an important transitional role to reverse run-away inflation and help resurrect the country’s short term credit market.  However, dollarization is not the optimal long-term solution for Zimbabwe as both ZANU-PF and MDC-T agree that, from a nationalistic perspective, Zimbabwe should eventually return to its own currency.  However, given the lack of the Reserve Bank’s lack of credibility, simply bringing back the Zimbabwe dollar may not be the way to go.

If Zimbabwe wishes to revert to its own currency, the central bank would order all US dollar bank accounts to be converted to the new Zimbabwean currency and require citizens to swop their US dollar banknotes for new Zimbabwean notes at a chosen exchange rate.

Professor Gavin Keeton of the Rhodes University Economics Department warns that, if Zimbabweans do not trust the new currency – which is highly likely – they will probably hold on to whatever US dollars they possess and attempt to convert all their US dollar bank deposits to cash ahead of the switch to the new currency.  This would be physically impossible, as Zimbabwean banks do not hold nearly enough US dollar banknotes to match the US dollar deposits in the banking system.

To move to a new currency without the people’s faith in its medium-term value would require freezing all bank accounts to prevent depositors trying to switch into US dollar notes.  This would precipitate a panic buying of dollar notes, causing the value of the new currency to collapse at the very moment it is introduced.

All of this has reopened the debate started in 2009 regarding whether it would not be preferable for Zimbabwe to incorporate itself into a credible, fiscally sound framework, such as the Common Monetary Area (CMA).  The CMA presently includes South Africa, Namibia, Swaziland and Lesotho.

According to the United Nations Development Programme (UNDP) working paper “Recovery of the Financial Sector and Building Financial Inclusiveness” published in 2009, it would be beneficial for Zimbabwe to join the CMA, as it would provide the country with access to the South African capital and money markets, the right to enter into bilateral agreements with South Africa and the ability to avail itself of temporary central banking facilities of the South African Reserve Bank.

Integrating the Zimbabwean economy with those of South Africa, would also facilitate cash transfers from Zimbabweans living in South Africa.

Should Zimbabwe join the CMA, it will have to subscribe to the tenets of the Multilateral Monetary Agreement (MMA), which requires members to scrap restrictions on the transfer of funds for current and capital transactions between members in the area.  It would also require conducting its monetary policy within the framework of the MMA, amending exchange control provisions to be substantially aligned with those of South Africa and managing its gold and foreign exchange reserves according to the policies adopted by the CMA.

The question remains whether the Zimbabwe government would even consider sacrificing the independence of its monetary system, irrespective of the potentially catastrophic impact of the alternative on the economy.  It may after all just be easier for them to start firing up the Zimbabwe dollar printing presses.