Zimbabwe’s New Banknotes Finally Arrive after False Start

Harare – Zimbabwe’s new banknotes have finally arrived after the central bank’s failure to circulate the new banknotes by the close of business on Monday as promised, ENN reports. 

The new banknotes are being hyped by the Zimbabwe government as a panacea to the country’s cash shortages which are crippling the economy through arbitrary acts. On Monday, banks, customers and currency speculators in Zimbabwe were left questioning the morality of their central bank in managing the country’s monetary issues after failing to deliver on their promise.

Productivity, not Cash will Fix Zimbabwe’s Economy

Zimbabwe’s annual inflation to date is estimated at 380 percent, the highest level since 2008. Analysts believe that the country erred in introducing a local currency without addressing its economic fundamentals, including building a foreign currency reserve equivalent to six months of its forex requirements and the promotion of industry productivity and growth through extending tax and performance incentives to critical economic sectors. These fundamentals would require a unified government voice in building business confidence and subsequently, market confidence in the new currency. Unfortunately for Zimbabwe, ahead of the introduction of the new notes by the central bank, the country’s Finance Minister Mthuli Ncube was quoted by a local publication saying that the local currency requires two years to stabilise, a statement that contradicts the central bank and government’s claims that the new notes will bring currency stability to the country.

Renowned Economist Steve Hanke warned Zimbabwe against printing its own money. Hanke argued that if Zimbabwe continues to print its own new money, it will worsen its monetary madness, in the process worsening its economic standing. Hanke further said Emmerson Mnangagwa’s government must redollarise to crush inflation and promote predictable market activities that guarantee economic growth.

Zimbabwe Treasury’s Reasons for not redollarising

The Zimbabwe government, through its treasury acknowledged that Zimbabwe’s monetary developments after the liberalisation of the bond note to US$ exchange rate and the subsequent  introduction of the RTGS dollar on 20 February 2019 were not sustainable as the local currency was losing an average of 1% in value per day. Self-dollarization was gaining momentum, which the Zimbabwe Treasury felt was detrimental for the reasons below:   

  1. Fiscal Constraints: Re-dollarisation requires the compensation of salaries in US Dollars. Given Zimbabwe’s tight fiscal space, nominal salaries had to be revised downwards to socially unacceptable levels.
  2. Loss of competitiveness: The US Dollar was appreciating against the currencies of Zimbabwe’s major trade partners, which made Zimbabwean wages and final products too expensive to compete. This resulted in trade imbalances, which was harmful to local industry.
  3. Liquidity crises: Given the scarcity of US dollars in the formal market, smooth transacting could not be guaranteed.
  4. Loss of monetary instruments: Monetary policy could not effectively manage business cycles and cushion the economy against temporary shocks.
  5. Vulnerability to sanctions: Accessibility of US dollar is constrained by restrictive measures affecting transactions with international banks.

Against these headwinds and the persistent foreign currency shortages, Zimbabwe saw an urgent need to introduce its own fully-fledged currency and to formally end the multi-currency regime, through the introduction of SI 142 of 2019, which was further operationalised by the Exchange Control Directive RU102/2019, an official statement from Zimbabwe Treasury said.

We will swap RTGS Values with New Notes?

As the new notes trickle into the market, Reserve Bank of Zimbabwe said the move will not increase money supply as the value of the new notes, estimated at ZWL$ 1 billion in total, will knock off RTGS values in circulation via electronic means. Considering Zimbabwe monetary authorities’ poor financial discipline record, supported by the ballooned broad money support in circulation today, the dishonoured bond notes to US$ value guarantee and the 2008 Zimbabwe financial crisis, it is difficult for Zimbabwean businesses to trust the bearer at this instance.

As the new notes join other local currency forms already in circulation in the form of bond notes and RTGS values, the real impact of government’s new banknotes in addressing Zimbabwe’s cash crisis and inflation will be in their performance. This is also an opportunity to measure the financial reforms and commitment of Zimbabwe’s new dispensation in rebuilding Zimbabwe. Time will tell.