Zimbabwe’s New $20 Banknote | Terence Zimwara
When the $10 banknote hit the streets a few weeks ago, parallel market exchange rates plummeted from Zwl $55 to its current range of between 65 and 70 for every one American dollar. This rate is nearly three times the official exchange rate of 1:25.
The so-called parallel market— which has long made up its mind about the true value of the local dollar—immediately made adjustments to reflect expected dilutive effect of that cash injection. For many, the parallel market is the only source for foreign currency.
The release of the new $20 banknote will most certainly result in the same (if not worse) erosion in the value of the Zimbabwe Dollar. As explained in a previous article, the Reserve Bank of Zimbabwe (RBZ) is caught between a rock and a hard place.
On one hand, the RBZ has to inject enough cash into circulation to upend cash hoarders who seem to profit more when cash shortages get severe. In Zimbabwe’s complicated currency markets, cash holders pay less for almost everything and this includes the buying of the US dollar on the parallel market.
For example, it currently takes anything north of Zwl $65 to get one US dollar when the payment method is through a mobile money platform like Ecocash or via a bank transfer. Yet one pays roughly Zwl 45 for the same when using cash. This partly explains the high demand for cash.
Furthermore, foreign currency generators like artisanal gold miners are traditionally paid in cash. The government understands that paying with artisanal miners with electronic money is not an option because many of them are unbanked. Besides, there are several ‘illegal’ buyers that already pay in cash hence the government cannot afford the luxury of paying via a bank transfer.
When the exchange rate falls—as it has been doing since the start of the year—the actual cash needed to pay for things like gold has to increase proportionately. Anything short of this will result in the country’s designated buyer of gold, Fidelity Printers and Refiners failing to pay for all the gold delivered. This is another reason why there is a high demand for cash.
Sadly, this privilege only extends to gold producers and other foreign currency earners. Everyone else has to primarily use mobile money or bank transfers when making or receiving payments.
While the strategy seems to work the RBZ will be the first to admit that this is only a half measure and perhaps this explains why the central bank still had to use its meagre resources to get the new banknotes. The new banknotes were reportedly printed in Germany.
Clearly, by introducing the larger denomination banknotes, the RBZ is signalling it does not want to ignore this extraordinary demand for cash. However, it wants to carefully manage this.
However, on the hand, the printing of more banknotes, especially the larger denominations will only fuel a sense of De Javu.
Zimbabweans have not exactly recovered from one of the worst hyperinflation periods ever recorded. The hyperinflation period of 2004 and 2008 culminated in the collapse of the Zimbabwe dollar along with the rest of the formal economy.
At the time, the RBZ would print larger denomination banknotes as it battled to contain the shortages of cash. But such printing would only succeed in accelerating the demise of the Zimbabwe Dollar. By 2008, the Zimbabwe Dollar had ceased to be an acceptable medium of exchange for many citizens.
Critics are now drawing parallels between what was happening then and what is happening now. When the RBZ starts introducing new banknotes, to these critics it simply means the economy is now in the exact path as was more than 12 years ago. Given such an environment, the best or common practice would be to hedge against the inevitable.
As alluded to in the last piece, the RBZ is well aware of this and this may explain the much slower release of larger denomination banknotes when compared to the Gono era. Evidently, the RBZ does not want to shatter the little confidence that remains.
Unfortunately, the seemingly contrasting approaches by the different RBZ executives will ultimately lead to the same place. The Zimbabwe dollar will collapse or it will be abandoned at some point. There are few countries in the world that have experienced the kind of hyperinflation seen in Zimbabwe and still managed to bring back their currency and economy from brink.
Confidence in a currency usually returns when things change on the political front.
This is because confidence is a unique commodity that takes time to build but can easily get destroyed.
In any case, when the Zimbabwe Dollar was brought back into circulation some eight years after it collapsed, not everyone was in agreement with this decision. Not enough had been done to restore confidence in the economy. In addition, the right economic fundamentals were yet to be attained.
Furthermore, when the life of the coalition government ended in 2013, the incoming government set about to restore the exchange control regulations, which had been dispensed with. The return of exchange controls, as well as the gradual centralization of foreign currency management, succeeded in spurring on a capital flight as foreign currency holders was unsure of the intentions behind such a move.
The effects of this capital flight began manifesting themselves starting in 2014 when the government struggled to pay its workers on time. It was clear then that there was not enough foreign currency to match the demand for it.
In the absence of donor support, the RBZ had only one way out and this was bringing back the local currency. However, it appears this strategy (of returning the local currency) might have run its course and there is now a need to entertain other propositions.
Of course, there are those that continue to believe in the cause of the Zimbabwe Dollar. This lot is determined to support a national currency even as conditions on the ground do not support this.
However, support for a currency cannot simply be based on sentimental reasons alone or because it comes with perks like subsidies or bailout packages.
At this point, a formal return to a multi-currency system might just suffice while efforts to cleanse the financial system are being undertaken.
While a return to dollarization is no panacea in itself does help to eliminate the distortions that brought back by the Zimbabwe Dollar. Zimbabwe should only have its own currency when trust and confidence have been fully restored!
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