Analysis| The Curious Case of Zimbabwe’s Bond Coins
The RBZ on December 5 2014 unveiled a set of coins that are planned to go into circulation tomorrow on December 18 2014. The coins will be in denominations of 1c, 5c, 10c and 25c pegged at par against the US Dollar and the 50c coin being introduced in Marchs 2015.
The premise of introducing these coins has been that they will aid the correct pricing of goods and services which is currently constrained by the absence of lower denominations.
An example of current adverse pricing at work is that sometimes instead of being given change in USD in a grocery store, you might be given sweets in lieu of US cents which tend not to be available.
On the face of it, the introduction of coins may be viewed as a noble gesture by the RBZ to save the average Zimbabwean consumer from the unideal commerce of being given change in sweets and chewing gums, but the more sceptical stakeholders see this as a solution to a non-issue in the face of other more competing challenges that face RBZ and the economy as a whole.
How we got here in the first place.
It is important to jog our memories to remind ourselves why the issue of Zimbabwe’s bonded coins is a concern for most people and financial institutions including the ZAPU Economic Affairs Research Institute.
On the 12th of April 2009, Zimbabwe had to take a humiliating but necessary decision to abandon its own sovereign currency. It was after a considerable time of hyper-inflation and inability by the government of the day to regain control of the economy due to ineffectiveness of the usual economic policy interventions.
It must be said that when a nation reaches a point that the central bank is ineffective, it indicates deep crisis in confidence in the manner that the system has been operated over a prolonged period.
A brief visitation of history into the culmination of Zimbabwe abandoning its currency can probably be traced to 1997 and 1998 when the government made unplanned expenditures on the war in DRC and then paid gratuities to war veterans which made the country’s already adverse national budget deficit worse.
Perhaps with just one of these events, the country would have temporarily pulled through the turbulent early 2000s without issues, but a combination of these two was just too much for the already strained budget.
When a nation constantly spends more than it collects in taxes, it harms investor and international institutions’ confidence in the government of the day to be ever able to fulfil its obligations to them or anyone for that matter.
In the case of Zimbabwe it is with reason as the nation is currently in arrears to the tune of circa $8billion with International Institutions in the last count in 2013.
From 1999, the ordinary man began to feel the effects of the early onset of an economic deterioration with the value of the Zimbabwe dollar falling and the cost of living significantly outstripping wages.
In the early 2000s, again the unplanned land reform programme left the nation with less agricultural exports for years, meaning the already teetering economy was now facing a new problem of foreign currency shortages in addition to the existing national budget deficit problems.
With the nation faced with economic hardship brought on by budget deficit problems and foreign currency shortages, the inevitable rise in extreme corruption joined the forces that were helping bring down the economy.
By 2006, the financial system was at meltdown with inflation at dizzy heights and exchange rates almost completely unpredictable on a day to day basis.
The RBS decided on the 1st of August 2006 to ‘redenominate the currency by ZW$1,000’ or in laymans terms wipe out 3 zeros from the value of people’s money; from cash savings, investments to bank balances which was probably the nail to the coffin of the Zimbabwe Dollar as we knew it.
Over-night, people lost savings, pensions, bank balances, investments, insurance policies and even countries holding the Zimbabwe Dollar in reserves had lost literally overnight. This ‘redenomination’ was repeated again in September 2007, July 2008 and finally in February 2009.
Again in laymans’ terms, the RBZ was deciding to wipe out the value of people’s hard earned money and investments at will and overnight.
It must be said that the process of ‘redenomination’ is unusual but not completely unheard of with one recent example being Turkey in 2005 who redenominated by TL1,000,000, but the fundamental difference is that no one lost any money or investments and it was done under the auspices of a stable economy.
In summary, the path that led to the demise of the Zimbabwe Dollar is lengthy, winding and multifaceted. The long and short is that corruption, breath-taking incompetence, a weak enforcement of economic crimes and some say sanctions made the Zimbabwe Dollar an unworkable currency.
The result of this unworkable currency was hyperinflation, unstable foreign currency exchange and loss of faith in the currency by the people of Zimbabwe and International community at large.
Back to the issue of the coins..
In light of the trauma that Zimbabweans have faced with the Zimbabwe Dollar from 2006 to 2009, it is a surprise to many that these RBZ bonded coins are on their way when a request for USD denominated coins from the Reserve Bank of America would have sufficed if the issue surrounding change was really a major problem facing Zimbabweans today.
Its become currency amongst many analysts to view this as a way being used to return to the Zimbabwe dollar in small and gentle steps.
Now, there is no patriot under the sun who wouldn’t like to see the return of their sovereign currency, but thethought of the return of the days of economic instability and hyper-inflation make most people sick to the bottom of the stomach. We would all like the Zimbabwe Dollar to return, but timing is of the essence, and now or next year is not a good time according to many analysts.
The main reason for it being too early is that;
All the individuals who were involved in Zimbabwe’s economic meltdown, corruption, catastrophic decision making and cataclysmic corruption are still the ones in charge of the levers of power today and can no doubt do it again;
The re introduction of a currency new currency requires not only nationalism but economic cooperation with the international community which is currently absent;
Fundamentals such as national budget deficits, corruption, inflation/deflation, unemployment and other important economic indicators can undermine the new currency if not intact.
This begs the question, when is a good time and what are the fundamentals required to ensure it works.
The next piece will seek to explore the how the Government can reform the fundamentals of the economy to get it working again.
Written by MelusiMoyo.
MelusiMoyo is the head of ZAPU Europe Economic Affairs Research Institute.
Released by ZAPU Europe Information, Publicity and Marketing Department.
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