WHEN Finance minister Mthuli Ncube was appointed, he hinted that Zimbabwe will have a currency of its own at some point, an admission that the bond note project has failed and will come to an end. Of course, the 2019 National Budget statement did not address this issue — much to the disappointment of many.
Following the announcement of the budget, the minister is repeating an aphorism common with economists: “The economy needs at least six months import cover, and it needs to be productive” before another currency can be launched. Anything short of that will only lead to a repeat of the 2008-style Zimdollar collapse.
Zimbabwe is not in a league of its own with respect to its collapsed currency. Countries like Argentina, Mozambique, Panama and lately Venezuela, have all experienced a total collapse of their respective currencies.
Sadly, more countries will suffer a similar fate in future. Therefore, the question everyone should be asking is: why do currencies keep failing? Why has there been no real plan or failsafe strategy that pre-empts currencies from collapsing? Perhaps the answers lie in what often underpins banknotes or fiat currency.
The world has known fiat currency (bank notes or bond notes) as the accepted medium of exchange since 1971 when multilateral financial institutions and governments abandoned the gold standard currency system. Whereas a gold standard system matched the quantity of currency in circulation to gold reserves held at a central bank, with a fiat currency system it is only the central bank officials who decide the quantity of currency in circulation.
So the value of fiat money is really an interaction of supply (as determined by central bank bureaucrats) and demand for currency. There is often no link to gold or any other valuable mineral stock. Indeed, governments were sold to this fiat currency idea since it potentially allows them to issue currency with value well beyond the country’s real economic means.
There is no doubt this system is subject to abuse, which often manifests itself in the form of diminished strength of a currency or inflation. That is why some want the fiat currency system to be abandoned.
Ron Paul, a controversial former US congressman, now 83, has dedicated the rest of his career to lobbying the United States government to abandon the fiat currency system. Ron Paul believes that political meddling and the secrecy of the US Federal Reserve makes the institution unaccountable and unsuitable for the US economy.
This lack of accountability results in uncontrolled money creation, corporate bailouts and quantitative easing policies, all of which cause inflation to spiral out of control. Ron Paul believes as consequence of this, the collapse of US fiat currency is only a matter of time.
Thousands of kilometres away, an almost similar debate has been ongoing ever since Zimbabwe dollarised in 2009, following the collapse of the Zimdollar.
Many Zimbabweans now understand that printing money without a corresponding increase in national output, (as what happened with bond notes) spells doom for the economy. That is why when the Reserve Bank of Zimbabwe (RBZ) desperately tried to convince masses in 2016, that bond notes would solve the cash shortages and the liquidity crisis, there were a few takers. Instead, some civil society groups resisted the introduction of the pseudo-currency by staging sometimes violent demonstrations. The RBZ would eventually have its way and the bond notes became Zimbabwe’s latest currency.
Bond note collapse
Sadly, two years later, the bond note currency project has ruptured. The pseudo-currency has failed precisely because in that period, national output has not increased, neither has the country’s balance of trade deficit disappeared. In fact, some economic indicators show that the economic situation worsened when bond notes came into play.
For instance, prior to the introduction of bond notes, official inflation figures were negative. Since then, inflation has accelerated to levels above zero for the first time in several years; it reached 20% in October 2018.
In fact, some experts like Steve Hanke, a professor of applied economics, believe the economy has already returned to hyper-inflation levels of three-digit figures! There appears to be no real plan to deal decisively with the currency because there is no consensus on what needs to be done.
For the moment, a cross-section of Zimbabwean economic experts believe an adoption of the South African rand will prove to be a short-term panacea to liquidity problems and cash shortages. Strangely, though, some of these experts believe the US dollar is no longer a “sustainable” currency even as the greenback remains a preferred currency of reserve for many countries. Others maintain that the US dollar is the solution, pointing to the period of relative economic stability prior to the introduction of bond notes.
Here is the reality: Zimbabweans will accept any other stable currency other than what the RBZ issues, because at least its (central bank) officials will have zero influence over quantities of that currency in circulation. In other words, the RBZ and its fiat currencies are unwanted by Zimbabweans, at least for now.
Unlike the US which is yet to experience a modern-day currency collapse, Zimbabweans experienced what Ron Paul fears, hence the lack of enthusiasm for another locally issued currency. Amazingly though, many Zimbabweans still have faith in fiat currencies that are issued by seemingly stable economies like the United States and South Africa. Only a few citizens have questioned or doubted the premise on which fiat currencies are founded.
Ironically, one of the few in Zimbabwe to question the long-term viability of fiat currencies was former central bank governor Gideon Gono.
In 2011, Gono suggested that the country could use its untapped mineral resources to back its own currency, a departure from fiat currency. He argued that the US Federal Reserve was engaging in the printing of money (quantitative easing) similar to what the RBZ had done during his reign and that this was not sustainable. The man knew the consequences, having presided over the cataclysmic collapse of the Zimdollar between 2004 and 2008 when he over-printed money.
Unfortunately, his idea had a few takers from the policymakers’ side hence the ensuing debate remained low-key before suffering a natural death. In any case, Gono had suggested using unknown quantities of yet-to-be extracted minerals as the currency guarantor. This seems an impractical solution because no one has been able to quantify the true value of Zimbabwe’s unextracted minerals. Besides, Gono’s proposition ignored costs of exploration, extraction and processing of the minerals.
The bottom line is this, the born-again Gono knew the limitations of fiat currency but he did not offer viable alternatives.
Globally, there are people who share Gono’s concerns about the longevity of fiat currency. As a consequence, a number of innovative alternatives to fiat currency are emerging. The most radical solution so far has to be the cryptocurrency known as Bitcoin that was launched in 2009 as the world’s first decentralised, private digital currency. Bitcoin has no physical denominations, it only exists inside of an interlinked computer network system.
Bitcoins are generated or “mined” through a sequence of complex mathematical formula run through computers. The anonymous creator of Bitcoin set a cap on total volume. Once that number is reached, no more Bitcoin can be generated. This is an important selling point for the cryptocurrency, there is no over-printing (or mining) which dilutes real value, something which happens quite often with fiat currency.
However, cryptocurrencies have gone through an evolution of sorts over the course of the last two years. After starting 2017 with a value of under US$1 000, Bitcoin value surged to US$20 000 by the end of that year. However, it began retreating in 2018 and by November it had fallen to below US$5 000. Mainstream financial gurus continue to cast doubts over Bitcoin, arguing it has no “intrinsic value”. Interestingly though, IMF managing director, Christine Lagarde recently urged central banks to begin exploring digital currencies of their own. In any case, few of these gurus have doubted the technology on which Bitcoins is premised — blockchain technology.
It remains to be seen if Bitcoin will weather the storm but, whatever happens, the reasons that gave rise to this cryptocurrency will remain. The same reasons are also giving rise to barter trading as people try to find lasting solutions to challenges inherent in fiat currencies.
Barter trade is emerging as another alternative to transacting in fiat currency. This may come as a surprise because problems associated with barter exchange gave birth to money as we know it today. However, the shortcomings of fiat money have forced some to go back to the drawing board, so to speak, where it all began.
According to the International Reciprocal Trade Association (IRTA), governments such as China, France and Ireland have considered launching state-sponsored barter schemes. Bartercard, a bartering organisation for small and medium enterprises, has more than 35 000 members and many companies have exchange mechanisms in place. The IRTA says that 30% of business worldwide is done on a barter basis.
Clearly, the growth of Bitcoin, barter trade and other alternatives point to problems with fiat currencies that need to be addressed. In Zimbabwe, the RBZ insisted it would not print bond notes in excess of US$200 million as many feared. There is one problem with that assurance, though, the process of currency printing is not open to the public neither can the public audit the RBZ operations.
This lack of transparency undermines public confidence in the currency and the government has to find ways of fixing this problem permanently. Without confidence, a currency will not survive even if it is backed by gold.
Zimwara is a writer and analyst based in Harare. You can contact him on 0771 799 901. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. Mobile: +263 772 382 852 and e-mail: email@example.com