Zimbabwe: The Zimbabwe Dollar Won’t Gain Any Confidence

Reserve Bank of Zimbabwe governor John Mangudya announced this week the introduction in a fortnight of new currency notes. Mangudya said the denominations, comprising of ZW$2 and ZW$5 notes and $2 bond coins, will be introduced gradually to ease the liquidity crunch, while ensuring that it does not stoke inflation. The new notes will circulate alongside the bond notes and coins introduced in 2016 as a surrogate of the United States dollar.

The injection is welcome, as it will stamp out the illegal sale of cash at exorbitant premiums. However, many Zimbabweans are dismayed that the new notes will be in small denominations, which cannot even buy a loaf of bread.

While Mangudya might prefer small denominations, based on theory, because it makes it difficult for unscrupulous dealers to speculate and hoard large sums, the cash will be extremely bulky, for example, ZW$1 million in ZW$2 notes.

A currency like the Zimbabwean dollar (Zimdollar) is fiat. Its value is determined by the confidence people have in it as a token of wealth.

It seems government wants to introduce small notes for psychological reasons; to conjure up an impression that there is discipline in terms of printing money. It is a flawed hypothesis considering it is not the size of the denomination of notes that renders a fiat currency stable.

Stability is only derived from the trust people have in the currency. If economic policies and fundamentals are unsound, the new notes will be shunned. Small denominations of a currency that is not trusted cannot guarantee restoration of confidence. Deception and cosmetic changes do not add value to the currency.

To create a favourable perception of the Zimdollar, government must stop money creation that is not backed by sustainable production. It should also cease exerting pressure on the central bank to print money (electronically) to fund schemes that ordinarily should be funded through free market allocation mechanisms.

Precisely, a fiercely independent central bank is needed to implement a comprehensive monetary policy and easily submit to government pressures to print money. It must restore or defend private property rights so that investors and exporters have confidence that their earnings will not be subjected to restrictions.

Exporters must willingly and freely sell their forex. Investors must not be told stories about non-availability of funds by the central bank when they want to repatriate dividends.

There is need to secure land tenure to enable a free market for land and private sector credit support. This will boost production and provide the solid basis for a trusted currency.

Overall, government must be committed to creating inclusive political and economic institutions that provide checks and balances. This will create the confidence needed for long-term investments and sustained economic growth.

Zimdollar will remain untrusted unless the small denominations are buttressed by essential economic changes anchored on political inclusivity.

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