Debunking Zimbabwe's currency myth

by Justice Zhou

At long last! Zimbabwe finally has a currency of its own. But how do you celebrate such an achievement if despite the introduction of the bond notes, you still face a critical shortage of them and the economy is on a bumpy ride once again?

Anyhow, it remains my strong belief that Zimbabwe’s current economic problems didn’t come about because of the much-hyped “bond currency” or bond notes. The liquidity or cash crunch was a long time coming; it’s a no-brainer!

It would be disingenuous for anyone to think that the reserve bank shouldn’t have introduced bond notes in the first place, even though they provide no ultimate solution to the country’s economic problems.

In other words, it would be a serious dereliction of duty on its part for the bank, which is required by law to perform its monetary policy functions.

At the same time, I do not believe the US dollar-denominated money will be the solution to the capital flight and meltdown that Zimbabwe has experienced since the results of the 2013 elections were announced.

There can be no doubt in my mind that the gradual outflow of capital has been the result of lack of confidence in the face of negative political events. The run on the banks, coupled with the smuggling of the US dollar out of the country, have been the last straw, adding to already existing liquidity woes.

Ironically, “the bond currency” or notes were introduced as a measure to stem the same liquidity problems or cash shortages that some are now apportioning all the blame for Zimbabwe’s meltdown on. This is quite unfortunate.

The solution to Zimbabwe problems doesn’t lie in currencies, no matter which one we introduce, the source of these problems isn’t necessarily the currency.

Perhaps, because of the misery of hyper-inflation which the Zimdollar era brought on us, we have obsessed ourselves with currency to an extent that this has clouded our focus on the real source of these economic problems.

Here are some of the most important issues that Zimbabwe needs to watch out for to gauge how fragile our economy is:

First and foremost, we should pay attention to the fragility of the banking system. When commercial banks are frail, they may not be in a position to lend or make new loans. This is not good because they are the backbone of consumer spending and corporate investment.

Without stability, lenders may only direct much of their efforts towards deleveraging their balance sheets and strengthening their liquidity buffers in order to cope with deteriorating depositor confidence, rather than creating loans to help boost economic growth.

The overall ratio of the local banking sector’s loans to deposits isn’t encouraging at all, also with a very high possibility that the lenders are highly-leveraged or rely too much on borrowing from abroad to fulfil their domestic lending duties, meaning that they are exposed to possible failure.

Secondly, Zimbabwe’s current-account balance is characterised by a yawning deficit at a time when the portfolio inflows, diaspora remittances and the inward foreign direct investment flows needed to finance it are scarce and exports revenues are low.

Although not classified as a highly-indebted country, and hence not qualified for debt-cancellation, Zimbabwe has to repay or roll over its sovereign debt. It has already gone to the IMF with cap in hand for loans without any success. Alternatively, it must run down its reserves, but these are not available.

In a nutshell, Zimbabwe’s problems are not as a result of currency. There’s more to them and we need to take a step back, reflect and apply our critical thinking skills.

Otherwise, you might soon realise that politics is the epicentre of what has roiled the local markets and put our economy back on the skids. If it is, then that’s probably were the solution lies.