In Zimbabwe, everyone is a currency trader. Two decades of disastrous policies have crippled one of Africa’s most promising economies and inadvertently created a society of foreign exchange specialists. In 2008-09, during the second worst hyperinflation in world history, Zimbabweans hedged their exposure to the national currency, the Zimbabwe dollar, by resorting to barter and building up reserves of foreign cash.
The Zimbabwean dollar was eventually abandoned. In the subsequent system, nine different currencies became legal tender, including the euro, the British pound, though the South African rand and US dollar were by far the most commonly used. Even the simplest grocery purchase often involved transacting in two currencies simultaneously. Later, as the South African rand fell in value, Zimbabweans traded out of rand and the economy became based on the US dollar. Zimbabweans thought that they had seen it all—until this week.On Monday, Robert Mugabe’s government introduced a local parallel currency called “bond notes,” the last straw in a succession of last straws. For years, a combination of illicit capital flight and an ever-widening trade deficit has drained Zimbabwe of cash. Over the course of 2016, the daily withdrawal limit from cash machines has been slashed from $10,000 to $20. But more importantly, in a country in which most people don’t have bank accounts, the absence of cash means the absence of transactions. The economy grinds to a halt.
Bond notes are meant to alleviate that problem by acting as replacements for US dollar bills. Officially, one bond dollar equals one US dollar, and low-denomination notes with a total nominal value of $10m have been put on the market. (Two years ago, bond coins taking the place of US cents were introduced for the same reason.)
But the people’s verdict has been swift and unequivocal. Presently, a bond dollar trades at US 70 cents on the black market according to early reports. In other words, on Monday morning Zimbabweans woke up to the very real risk that their bank balances and salaries had dropped by 30 per cent. Even worse, many petrol stations, vendors and supermarkets are refusing to accept the bond notes at all.
Having already lost their savings once in the hyperinflation and seen the economy implode, Zimbabweans simply do not trust their government with their money. That was the reason for switching to dollars in the first place. However, ever since this happened, the government has tried to get its hands back on the money presses. Without control over the money supply, the regime is losing control over its supporters. The bond notes constitute the third phase in its efforts to introduce a national currency by stealth.
In 2013, the government started issuing treasury bills to settle debts with domestic financial institutions. Today, government paper makes up 80 per cent of “liquid” assets in the country’s financial system. In parallel, the government has been raiding commercial banks’ foreign-reserve holdings. Digits on the bank statements of depositors no longer correspond to any internationally recognised form of value. Without the foreign reserve to back your funds, you can neither withdraw it in the form of cash nor send the money abroad to fund imports. The sole use is to transact digitally with other domestic accounts.
Zimbabweans apply a discount to digital dollars just like they have started doing to bond notes. This raises the spectre of a return to hyperinflation—particularly as bond notes are viewed as the last step before the introduction of a fully-fledged national currency. Since the end of the gold standard, currencies rely on trust in the issuing institutions. In Zimbabwe, that trust evaporated a long time ago. As the seasoned traders that they are, Zimbabweans have learnt to short any form of local currency and by doing that, they effectively short the government.
