BREAKINGVIEWS-Zimbabwe takes monetary lunacy to the next level

By George HayLONDON, May 22 (Reuters Breakingviews) - A decade or so ago,
Zimbabwe introduced the 100 trillion Zimbabwean dollar note - a
response to hyperinflation caused by lustily printing Zimbabwean
currency to pay its bills. Now, nonagenarian leader Robert
Mugabe is doing something similar. Only this time, his country
is printing U.S. dollars instead.

Source: BREAKINGVIEWS-Zimbabwe takes monetary lunacy to the next level – Nasdaq.com

Like many emerging markets, Zimbabwe uses the greenback as a
sort of alternative currency. But supplies are running low,
partly owing to a large and persistent trade deficit and a lack
of trust in the local tender. In 2009, physical cash in U.S.
dollars constituted 49 percent of the country's commercial bank
deposits. By last December it was only 6 percent, according to
an analysis of Reserve Bank of Zimbabwe data.

    A good solution to this dollar shortage would be to cut the
swollen public sector wage bill and stimulate exports. A bad one
would be to copy criminals in dollarised countries like Ecuador,
and make counterfeit cash. Zimbabwe has chosen something novel:
counterfeiting electronic dollars. Commercial banks have had
their balances at the central bank credited with dollars. They
then use that to buy bonds from the government, which uses the
money to pay civil servants.

    The idea of conjuring dollars from nowhere with the tap of a
keyboard sounds too good to be true, and is. New dollars aren't
backed by foreign reserves, so the more electronic currency is
created, the more obvious it becomes that they aren't real. The
result is something strange: physical dollars trade at face
value, but dollars in the bank do not. Zimbabwe has created a
new pseudo-currency, which local economists call the "zollar".

    Zimbabweans' concerns are hiding in plain sight. Many people
wait outside banks for hours to get hold of a daily restricted
amount of real cash. Funds moved by citizens to foreign banks -
or "externalized", to use the official euphemism - doubled to
$600 million between 2013 and the third quarter of 2016,
according to data cited by the Zimbabwean central bank. And
buyers are demanding more zollars than dollars for the same
goods. As of May 19, Harare-listed shares in insurer Old Mutual
were trading at a $3.75, against $2.49 for those trading in
London.

    Thus far, the central bank has blamed Zimbabweans for
capital flight and social media for encouraging what it
described on May 9 as "shenanigans". Government officials are
cooking up alternative plans - including obliging state mining
companies to set aside gold to back a new currency.  The
International Monetary Fund, which will shortly release its
annual report on Zimbabwe, warned on May 15 that Zimbabwe needs
to start "refraining from central bank financing of the
deficit". That's the polite way of putting it.
    On Twitter https://twitter.com/gfhay

    CONTEXT NEWS
    - The International Monetary Fund said on May 15 that the
Zimbabwean economy was "facing difficulties". It called out high
government spending, fiscal imbalances financed by domestic
borrowing, and called on authorities to reduce the deficit to a
sustainable level.

    - To restore confidence, the IMF said "refraining from
central bank financing of the deficit", and "containing the
issuance of debt and quasi-currency instruments" was "vital".

    - The Zimbabwe government is working on a plan to establish
a gold reserve to anchor the re-introduction of its own
currency, All Africa reported on May 16.

    - The plan could see the government investing in its
interests in the Sabi, Elvington and Jena gold mines, which have
not been operating in recent years due to lack of capital.

    - Once all the companies owned by government start
operating, they could be required to set aside part of their
gold output to be kept as reserve by the Zimbabwean central
bank.

    - For previous columns by the author, Reuters customers can
click on [HAY/]

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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Zimbabwe's high state spending may deepen cash crunch - IMF
[nL8N1IH6U1]
IMF report    http://www.imf.org/en/News/Articles/2017/05/15/pr17172-imf-staff-completes-2017-article-iv-visit-to-zimbabwe
All Africa article    http://allafrica.com/stories/201705160480.html
Reserve Bank of Zimbabwe statement    http://www.rbz.co.zw/assets/press-statement-on-false-and-malicious-statements-being-circulated-on-social-media-9-may-2017.pdf
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by John Foley and Liam Proud)
 ((george.hay@thomsonreuters.com; Reuters Messaging:
george.hay.thomsonreuters.com@reuters.net))

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