Zimbabwe’s currency crisis

via Zimbabwe’s currency crisis – Lexology. 17 June 2014 ENSafrica by Celia Becker


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.


  • comment-avatar

    This will be the end, particularly if the army and police refuse to be paid in monopoly money

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      Economist 8 years ago

      The police don’t rely on government salaries. They rob you and me at roadblocks every day.

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    John Thomas 8 years ago

    Let these clowns try. It will be their Stalingrad

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    saundy 8 years ago

    As placid as we are I doubt we will allow ourselves to be duped by ZPF a second time. The shelves will clear overnight & it will only accelerate the demise of the economy unlike the 2007/2009 era when many were caught off guard. Surely even ZPF can’t be that stupid!

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    Zimbabwe will never be a colony again. Words that have come back to haunt the authors. Farmers were dispossessed but their loss has resulted in the loss of an entire country. And still they stubbornly cling to their delusions. Remember that chaos makes them difficult to hold to account. Bleak outlook.

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    If this Government would have started from the beginning and made sure that it’s gold reserves were secured instead of stolen. That it’s land was utilized by professionals to maximize agricultural capability instead of giving it to looters. Let the professionals run the transport networks. Left the manufacturers to manufacture. Let the miners mine.Let the sportsmen play their sports. Left the teachers teach. Left the bankers alone so they can do banking. Let the councils develop their cities. Let the tourist tour. I can go on and on…THE ZIMBABWE DOLLAR WOULD COME ALIVE. IF……even after they messed up they tried to do this. Now they want to operate a ghost that has haunted all of us. MAD PEOPLE WITH MAD IDEAS.

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    Remember Hitler patting boys on the head as the Russians were pounding the outskirts of Berlin encouraging them to fight bravely for the fatherland. Mugabe is of the same mind so don’t expect rational thought from him.

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    Mscynic 8 years ago

    It’s not about “currency”. It’s about TRUST. Even then look at the Zambian model – 1994 removed Excon and the economy stabilized ; Sata reintroduced Excon in 2012/3 and the slippery slide started again. March 2014 Excon repealed again to stop the slippery slide. Return to a manifestly mistrusted currency is not necessary, not recommended and not inevitable. Establish TRUST and follow the Zambian model.

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    If Zimbabwe joins the CMA, this might be the start of a long overdue regional fiscal integration.

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    Guvnor 8 years ago

    It is simply a matter of living within your means. Once the state seeks to recieve more value than it gives to the country in the form of service delivery it will result in the economic problems and quagmire as is currently the case. The discipline and commitment of the state to manage within a budget based on the countries actual income is far far more important than which currency unit you happen to be using.

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    jobolinko 8 years ago

    There is no way round it because its politicaly zimbabweans are tired of zanu and they dont like them

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    jobolinko 8 years ago

    Mai chatunga said mdc did nothing during the gnu because chinamasa was already in the process of introducing the u.s dollar before then so now what has gone wrong, She cant imagine life not being the first lady

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    what is the value of Zimbabwe currency vs US dollar for example i need value of 10 billion Zimbabwe for US dollar please reply anybody

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      Delane Dinha 3 years ago

      you people you have to work together for the better those ministers are living luxurious lives