In a recent speech leading up to an end-of-month national election, Zimbabwe’s President Robert Mugabe hinted at the possibility of introducing a gold-backed Zimbabwe dollar.
This is from the Mail & Guardian:
Then there is the business about the Zim dollar, that one issue that makes every Zimbabwean wake up in a cold sweat, and one that every candidate should really avoid. We cannot use the US dollar forever, he [Mugabe] begins. We will have to look at ways of bringing back our currency, sometime in the future. There are uncomfortable murmurs. Mugabe appears to be thinking out loud. “Should we, should we not?” he asks himself. “What if we back our currency with all our gold? Wouldn’t it be strong enough? Maybe not now, of course, but sometime in the future. Maybe we will talk to [Gideon] Gono, the Reserve Bank governor.”
I’m sure the memories of the hyperinflation are too fresh in the minds of Zimbabweans for them to buy into the folly of letting the insane duo of Mugabe and his central banker, Gideon Gono, once again have their own printing press, even if that press is to be constrained by gold convertibility. Let’s take a quick glance through the 2007 Reserve Bank of Zimbabwe (RBZ) annual report [link] for a refresher of what the two of them got up to the last time around. By then in the midst of a severe hyperinflation, the RBZ’s 2007 report kicks off with a boilerplate disavowal of any responsibility for the plunge in the Zim dollar’s purchasing power, blaming it on “supply side constraints, speculative activities, and adverse expectations.”
The report goes on to describe a dizzying number of “support” programs set up by the RBZ. These include in no particular order:
A) Farm Mechanization Program: to provide farmers with the funds to purchase tractors, combines, plows, and sprayers.
B) Agricultural Sector Productivity Enhancement Facility: to provide low cost funds to support producers of beef, pigs, and poultry
C) Parastatals Reorientation Program: aid to suffering government-owned businesses including Cold Storage Co of Zimbabwe, Tel One, and Net One.
D) Basic Commodities Supply-Side Intervention Facility: targeted financial support to ensure a quick return of basic goods to supermarket shelves
E) Tourism Development Facility: funds for hotels, lodges, and tour operators
F) Seed Development Program: funding to procure maize, soybean, and sorghum seed
G) National Cattle Herd Restocking Program: the purchase of breeding cattle for onlending to farmers
H) Rural Business Facility: funds for rural retailers including hardware shops, wholesalers, and butchers.
I) and more…
A large quantity of the support provided via these RBZ programs went straight to Gono and Mugabe’s friends and allies. Coincidentally, it would seem that Gono, while RBZ governor, has become one of the biggest chicken farmers in Zimbabwe, recently boasting in the press that he expects to be Africa’s first chicken-farming billionaire. Even if Gono didn’t fund his farming dreams by diverting funds from RBZ agricultural support programs to himself, his suppliers, or purchasers, the conflict of interest presented by Gono’s twin roles as chicken farmer and chicken farm financier is breathtaking. It would be like putting Jamie Dimon in charge of the Fed, without requiring Dimon to resign from and sell his shares in JP Morgan.
Most of the RBZ’s special lending programs, as well as the direct financing of the government carried out by the RBZ, were granted at rates far cheaper than the market rate. Whenever a central bank keeps its rate perpetually below the market rate, hyperinflation is the inevitable result. But in Gono and Mugabe’s Alice in Wonderland world, their so-called support programs weren’t the cause of the hyperinflation, but rather the cure to hyperinflation. How did the pair square this very odd circle? Here is Gono explaining the Farm Mechanization Program:
Many may wonder why Your Central Bank gets involved in some of these activities which, on the face of it, appear to be outside our core mandate of inflation fighting. Your Excellency, inflation remains our number one enemy and core business. Thirty three percent (33%) of that inflation relates to Food and Food items alone. It follows therefore that our attempts to boost agricultural productivity in collaboration with Government and other stakeholders is actually an ancillary and incidental part of our core business.
According to Gononomics, inflation is not something created by a central bank but an external enemy that must be fought. The RBZ’s cheap loans to the farm sector didn’t set off inflation, but rather they improved productivity and reduced food prices, thereby reining in inflation. Reality, of course, had something stern to say about this. The Zim dollar continued to plunge in value, eventually hitting zero a year after Gono’s speech. Gono and Mugabe were appropriately stripped of their printing press by the course of events, and that is how the situation should stay.
I’ll deal with a few reasons that might be put forward for the resurrection of the Zim dollar, and why these reasons are not sufficient to counterbalance the danger of giving our two hyperinflationistas their own currency.
1) First, many people complain of a “small change” problem in Zimbabwe. A paucity of US dollar coins in circulation means that it is difficult for someone purchasing, say, $1.85 worth of food with $2.00 to get back 15c in change. While we in the West might consider change to be an inconvenience — it is heavy and clinks around — in a country like Zimbabwe where the average daily income is only a few dollars, the lack of coinage is a major problem.
This is hardly an issue that needs to be solved by a new Gono dollar, though. One route that Zimbabwean shopkeepers have taken to make things easier is to provide change in by the form of gum, candy, or other small items. This isn’t an ideal solution, but it is a start of sorts. Private bus owners give change in the form of coupons that can be redeemed for transportation at some later date. These coupons don’t appear to be highly liquid, though. The South African five rand coin has been recruited to serve the role of a 50 cent piece, regardless of the actual exchange rate between rand and US dollars. This is fine for now, but as the USD-ZAR exchange rate changes over time, the use of rand coins as change in US dollar transactions may become computationally burdensome.
A better solution would be to allow private Zimbabwean banks to coin or print 10c, 25c, and 50c tokens/coupons that, when brought back to the issuing bank, might be converted into their dollar equivalent. This would require the regulatory blessing of the RBZ. The RBZ, unfortunately, seems to be extremely jealous of those who would print or coin currency. In a bizarre story from this spring, two “prophets” claimed to be able to create US dollars from scratch, those in their audience reportedly receiving “miracle money” in their pockets. Gono immediately investigated the duo, eventually clearing them of any wrongdoing. If so-called miracle money receives such scrutiny from the RBZ, one can be sure that bank-produced small change would have to jump through incredibly high hoops before being permitted.
Lars Christensen has also discussed the small change problem in Zimbabwe, noting the potential for e-money to fill the gap. I won’t go into any depth on this possibility since Lars has covered it in some detail.
2) A second purported reason for introducing a new Zim dollar is to provide for the lender of last resort. Since the RBZ can’t print US dollars willy nilly, Zimbabwe banks can’t turn to their nation’s central bank when they need liquidity support.
We’ve grown so used to the idea of a lender of last resort that we rarely stop to consider that such a lender is not a necessary feature of an economy. Panama has been effectively dollarized since 1904 and for that entire time has been without a lender of last resort. Panamanian banks have adapted by holding relatively high levels of liquid assets as self-insurance [link]. Bank failures have been small and infrequent, with the only major crisis event being related to the Manuel Noriega incident in the late 1980s. [link]
Like Panamanian banks, Zimbabwean banks will adapt to the lack of lender of last resort by modifying their own banking practices to ensure that their balance sheets are sufficiently flexible to deal with liquidity crisis.
In sum, Zimbabwe’s currency situation is better than it has been in years and will only improve as technologies and practices evolve to deal with the small change problem, and as banks position themselves to deal with potential liquidity shortfalls. A Mugabe/Gono attempt to bring back the Zim dollar, whether it be gold-backed or not, is thoroughly unnecessary. Should the duo succeed in linking a new currency to gold, it is probable that they’ll quickly close the gold window in order to get back to their old ways, a scenario that no one wants. With any luck, Zimbabweans will throw the scoundrels out onto the street come election time. Mugabe and Gono certainly deserve it.