Zimbabweans face an unusual prospect of seeing a second economic collapse in just over a decade after a similar event took place. This is prospect is quite unusual because it usually takes a two or more generations before something like this happens but already there are three generations that can now attest to the devastating effects of hyperinflation. It’s only a matter of time before they all witness another cataclysmic currency collapse.
Of course, authorities are not sitting by idly while everything unravels; real attempts are being made to arrest the situation. Both the finance ministry and the Reserve Bank of Zimbabwe (RBZ) are battling to contain the run-away inflation whilst attempting to narrow the unsustainable trade deficit. At the same time efforts are being made to channel more foreign currency into the formal economy.
Part of the steps undertaken to achieve this includes the reintroduction of the Zimdollar, some eight years after it collapsed as well as a return of stringent foreign exchange controls.
However, these two are emotive subjects in a country undergoing another economic recession almost a decade after the last one decimated the economy.
Battle for control
Zimbabweans specifically lack confidence in those running the affairs of the RBZ as evidenced firstly, by resistance by some pressure groups and the general population to a return of a local currency back in 2016.
In fact, prior to the formation of the unity government in 2009, there was a standoff between the bickering political parties over control of the central bank. The MDC party, which had won a parliamentary majority, wanted the then central bank governor, Gideon Gono, to be replaced by an ‘independent’ person and pave way for reforms which foreign investors expected.
The ZANU PF party which won the presidency during the same election, insisted on Gono remaining at the helm of the RBZ something that enabled the party to maintain control of the institution.
While ZANU PF ultimately prevailed in this tussle, the new government still managed sideline Gono and the central bank, something which markets applauded. Undeniably confidence was restored partly because of this arrangement which only lasted for four years the same as the tenure of the coalition government itself.
The second obvious sign that Zimbabweans lack confidence in their own currency has to be the continuing defiance of regulations that forbid the use of foreign currencies in settling local transactions. Persons caught charging clients in US dollars or any other currency risk serving jail time yet businesses are openly asking clients to pay in foreign currency.
Indeed events that have occurred from the time local currency made a return to this day all seem to vindicate the stance taken by those long opposed to RBZ printing money. All the financial impropriety that beset the central bank between 2004 and 2008 as well the corruption or the quasi- fiscal activities, which all helped to accelerate the demise of the Zimdollar 1.0, have all but returned.
These acts have once again been central to the rapid collapse of the Zimdollar 2.0, a currency now trading at a value 15 times less than it did at the start of the year. Put simply, the currency has collapsed by more than 1500% this year alone!
Lack of confidence
Meanwhile, there is an alternative view shared by some economists which asserts that the collapse of the Zimdollar 2.0 seen so far is largely down to lack of confidence. These economists aver that since citizens lack faith in the RBZ, anything that it does will fail not because of incompetence or lack of will, but because people are already resigned to the fact that it will not succeed.
This kind of pessimism only works against RBZ efforts regardless of its sincerity or lack thereof. In fact, some at the RBZ are well aware of this lack of confidence which predates the returned Zimdollar and this may explain why the institution tried—although unsuccessfully—to assure Zimbabweans that bond notes were not a return of the local currency through the back door as was widely alleged then.
As the screenshot above shows, the RBZ (in 2016) wanted to people to believe it was not going to introduce a new currency if certain conditions—that everyone agrees to be essential— were not met. Ironically the RBZ still went ahead and reintroduced the Zimdollar 2.0 two years later even as these ‘conditions’ remain unfulfilled thus further adding to the confidence deficit it already has.
Attempts to use draconian laws will not help the RBZ to make up for the lost trust but as they say history has a knack for repeating itself. The year 2019 has seen different regulations being introduced to support the local currency.
For example, there are new regulations that compel people transacting in foreign currency to reveal the source of such funds but one is almost assured that such regulations will fail because people generally lack confidence in the only legal tender, Zimdollar 2.0.
So if a law is ignored by the majority then perhaps such a piece of legislation is not only immoral but illegal as well and authorities must take heed.
And as one famous scholar once remarked, it is insane for the current RBZ leadership to resort to the same tactics (threats and punitive regulations) used during the Gono era and still expect a different outcome. Zimbabweans expect the Zimdollar 2.0 to collapse at some point despite sustained efforts to blunt this view and no law can change this.
In fact, many believe that only when more credible individuals, perhaps those from a different political party are given the reigns of the RBZ, will confidence be restored.
Unfortunately such a scenario looks far-fetched at the moment suffice to say that such a solution will only work temporarily.
So what must be done to deal with Zimbabwe’s currency troubles once and for all?
The answer will depend on how seriously the RBZ wants to solve the confidence crisis. Confidence is the life blood of any currency, without it a currency will not survive for long. Even the backing a currency with precious metals like gold or diamonds will not work if people lack confidence in the system.
So the starting point for RBZ—or any central bank in a similar position—would be to resolve the confidence challenge before rushing to issue a different currency. Confidence is not about the change of colour of the banknotes or the use of fancy terms to describe the currency. Addressing confidence means going right to the core of the problem, who prints the currency? Who distributes it? Who audits the RBZ?
When the above concerns are fully addressed only then will the RBZ be able to announce the release of another currency with confidence that will be embraced and that it will stay like that for years to come.
Fortunately for Zimbabwe’s RBZ, there is a way of assuaging skeptical citizens that a new currency has value and that it (RBZ) has reformed. A blockchain (or a publicly distributed ledger) supported currency is the best way for tainted central banks like the RBZ to quickly restore trust and confidence of the general public.
A digital currency that is underpinned by the blockchain is the best way to prove to users that the issuer has nothing to hide. For instance, if the currency issuing authority announces that it will inject digital money into the financial system to the tune of USD$200 million as the RBZ did when it printed the bond notes in 2016, the blockchain will verify this and any attempts to issue beyond the set figure will be unmasked or rejected by the protocol.
Counterfeiting, both official and unofficial will prevented and the dilution of value will be averted.
Such transparency will be vital in sustaining a currency more so if the proposed currency is backed by a precious metal.
The RBZ does not have to master cryptography to succeed at this because it can always partner with credible institutions that are more adept with these technologies.
Venezuela, which is also facing unprecedented levels of hyper-inflation, attempted to issue its own digital currency in 2018, the Petro, but so far the token has not had the envisioned success. The failure of the petro token is down to a lack of transparency something any reformed central bank would want to avoid.