by Justice Zhou
If this article is really meant to be frank, it is. Now that
the much-anticipated collapse of Zimbabwe’s makeshift “bond currency” has not
yet taken place, let us look into how the hotly-contested money has managed to
survive.
Sometimes as a mere journalist, it may prove very hard to
argue in the opposite direction to the herd mentality and against the masters
of the financial universe.
But in finance and economics theory, a currency experiences
a sharp fall in its value when there is rampant rise in the rate of
inflation. This condition holds if authorities print unsustainable amounts of
money and inject them into the economy.
With excess loads of money available in the system,
households, businesses, and government entities must then have an
uncontrollable urge to spend, thereby stocking a sudden rise in the prices of
goods and services. If supplies of goods and services are critically scarce on
the back of too much money, economists say demand for them will then lead to hyperinflation.
During Zimbabwe’s hyperinflationary era, there just has been
too much money chasing too few goods and services, and hence the Zimdollar
collapsed. But why has the same theory failed to hold for the US
dollar-denominated bond notes and coins, even as more of them have been ushered
into the system?
First, I don’t think the amount of bond currency that the
reserve bank has been “drip-feeding” into the financial system can necessarily
be referred to as “rampant” or “out-of-hand”, as some folks will have us believe.
Second, a money supply cap of US$200 million seems to me a
minute fraction when compared with the over indulgence we saw in the Zimdollar/bearer
cheque era. The fact that the money is still in short supply and queues for it
at commercial banks are still the order of the day is testament that it still
is nowhere near the conditions that will lead to its expected collapse.
The debate that is going on in the traditional and social
media platforms appears to be centred on suggesting that there is an orgy of
bond currency supply that would soon result in its collapse, sending the
already troubled economy into a tailspin.
The herd mentality has all been about how the bond notes are
the genesis of Zimbabwe’s economic collapse, which appears to be a generalised diversion
from the real cause of the meltdown, which started in 2013 long before the bond
notes came in.
Another topic that has added an interesting dimension to
this debate is the role played by Gresharm’s Law in the Zimbabwean multicurrency
setting.
Gresham’s law is referred to as a monetary theory charging
that "bad money drives out good". For example, if there are two forms
of currencies in circulation, which are accepted by law as having similar face
value, the more valuable currency will disappear from circulation.
With the US dollar fast disappearing from bank vaults and
from circulation in the multicurrency system, some experts argue the effect of Gresham’s
law is already underway, really? Let’s go back to 2013, and examine the goings
on soon after the elections. Were there no immediate reports of a sudden run on
the banks and ensuing disappearance of the greenback gradually?
Well, if you thought bond currency has eventually met its Waterloo or is about to unleash another bout of crippling hyperinflation on
long suffering Zimbabweans, I beg to differ.
The reasons behind the current meltdown cannot be linked to
the US-denominated currency, which the central bank alleges to have introduced
recently to counter the smuggling of the greenback and incentivise exports among
other purposes.
Production at factories has ticked up a bit since 2009 and
goods are available on supermarket shelves as compared to 2008. This is on the
back of currency shortages, which includes the bond notes.
Demand-pull inflation is supposed to arise
when aggregate demand in an economy outpaces aggregate supply. In the current
situation, where the opposite is true, it doesn’t seem to hold.
Rather, there has been a general collapse of confidence, leading to an outflow of the US dollar currency as people don't
want to risk losing their money. Hence, this has caused an outflow of capital. This
collapse in confidence can easily be traced back to political factors such as
the aftermath of the 2013 elections.
The bond currency cannot be the ultimate cure to Zimbabwe’s
ills. It also isn’t going to collapse or depreciate massively as others appear
to suggest because the conditions that are required for it to do so can’t hold
at the moment.
If Greshan’s law is anything to go by, it wasn’t triggered
by the bond currency in the first place. I’m not an advocate of the bond currency
or the policies of the current government and don’t get me wrong. I just like a
situation where we can begin to be more discerning when looking into issues
bedevilling the country.
The country fundamentals are still so bad, and there’s more
to the economic troubles we face today than just the recently introduced
currency. Some will say the black market has devalued it and it trades at
such and such exchange rate to other foreign currencies. Yes, it’s true. But what
overall impact on the economy does it have, considering that one can still buy
groceries with it at a local supermarket at par with the US dollar?
