The bond coin fallacy

In a normal economy, the money supply can be used by the Reserve Bank to influence prices. This is what happened in Zimbabwe in 2008, when the RBZ was printing just too much money, while the local productive base was not producing enough goods. As a consequence, we ended with too much money chasing too few goods. The result was the devastating hyperinflation that resulted in the lack of confidence in our local currency. In the current scenario, the RBZ cannot print the US dollar and is therefore unable to use money supply as a monetary policy tool to influence price levels. This means that we are vulnerable as an economy to the erratic inflows of US dollars into the economy. In addition, because our local production of goods and services is minimal, the cost of imports is the biggest determinant of price levels. If we further examine what is driving the high prices of goods and services in Zimbabwe, we will see that the cost drivers are utilities, import duties, transport, high salaries and more important, the psychology of profiteering. This psychology of super profits is now so prevalent in Zimbabwe that the price of goods and services is more influenced by what people think and feel about the future as opposed to the actual cost of the production or importation of goods and services. We have a society that now thinks and acts short term and this has had significant impact on the pricing of goods and services. In addition, we no longer have any confidence in our institutions, both government and particularly banks. We distrust their intentions and are also not sure how the future will turn out. As a result of all this, money in our hands today and spent is better than the promise of money in our hands tomorrow. In any society like this, no amount of institutional policies will change the fact that we do not have confidence in our monetary system as a society, nor do we have the confidence that our banking institutions, or government for that matter, will do what is in our interest. So we don’t bank our money, we over-charge for goods and services and as soon as we make some money, we spend it and are therefore not saving any money for the future. We have a crisis of confidence. This crisis of confidence mainly emanates from the 2008 experience and the political uncertainty about our future. We fear the reintroduction of the Zimbabwe dollar given our last experience with it and the pain associated with the loss of our purchasing power and wealth by the hour, as happened in 2008. The hyperinflation trauma of 2008 has left an unhealed wound in our psychology on how we think about money, its value and the future. Given this scenario, any idea that if you inject local bond coins into the system, prices will go down is not only a fallacy, but also against economic theory as explained above. As a response, we have seen a very large resistance to their use despite continued assurances by the banks and large retailers that they will accept them. The intention to see a reduction in the general level of prices by introducing bond coins has not worked at all simply because we are using the wrong medicine to treat a common and contagious disease. The vendor selling her tomatoes still wants her one dollar for a bag of tomatoes; she has not reduced her prices and packed twenty five cent bags. The baker still wants one dollar for his loaf of bread, the butcher also wants one dollar for that piece of meat and the taxi driver still wants his one dollar for that trip. If anything, bond coins could have been a mere convenience but certainly not a price changer. Interestingly enough, to counteract the need to have to accept bond coins; we have seen an increase in the circulation of Rand coins in the system as a reaction to avoid the use bond coins by the public. Zimbabweans do not trust their government. The perceived value of the US dollar in Zimbabwe is therefore mainly driven by emotion and lack of confidence in the system. The high costs of living will continue to drive the pursuit of short term gain in the pricing of goods and services which in turn will continue to keep prices up. This cycle feeds itself and can only slowly be broken by a return of confidence in our government, our banking institutions and the revival of the local production of competitively priced goods and services. Our problem is therefore much deeper and until we appreciate we will continue to prescribe the wrong medicine. Authentic political leadership, improved certainty about tomorrow, integrity of the government and banking institutions, less greed and materialism, a belief in a better tomorrow are to me the only the priceless antidotes for high costs of living and the lack of confidence prevailing in our society.

Vince Musewe is an independent Zimbabwean economic writer and analyst. The opinions and views expressed in this article are the responsibility of the author. The Konrad-Adenauer-Stiftung does not necessarily subscribe to the opinions and views.