The Death of Sovereign Fiat in Zimbabwe
Zimbabwe’s economy has been struggling since President Robert Mugabe encouraged the takeover of commercial farms owned by white settlers in 2000. This sparked a chain of events that lead down the path of economic fragility and downturn. Zimbabwe’s economic challenges are once again highlighted, as its sovereign currency is no longer in use and President Mugabe is trying to establish a new currency, pegged to the US dollar, in an attempt to restore economic stability.
Zimbabwe’s Economic Woes
Zimbabwe gained independence from colonial rule in 1980 at which point Robert Mugabe was elected president. Initially, President Mugabe convinced roughly 200,000 white Zimbabweans, including 4,500 farm owners, to stay and become part of democratic Zimbabwe.
However, Mugabe later changed his mind about white farm ownership and blamed economic problems on white Zimbabweans and the Western world. In 2000, Mugabe held a referendum to expand his presidential powers and to allow his government to seize land claimed by white settlers. Despite the referendum resulting in a “No” vote due to campaigning by the Movement for Democratic Change (MDC), many of Mugabe’s supporters violently seized white-owned farms, which lead to an exodus of white Zimbabweans.
This, in turn, soon led to food shortages and famine in the country as its farming industry collapsed thereafter. Due to a lack of food to feed the nation, a reduction in foreign investment, a deterioration in international trade relationships, and international sanctions Zimbabwe consequently fell into a deep economic depression and its currency suffered hyperinflation.
The Passing of the Zimbabwean Dollar
Zimbabwe’s economic decline was reflected in the collapse of the value of its sovereign fiat currency, the Zimbabwean dollar. From 2000 onwards, the Zimbabwean dollar suffered from hyperinflation, which led to the central bank printing more and more money in an attempt to curb the problem.
However, the printing presses in Harare could not keep up with the drop in the value of its currency, which eventually dissolved into worthlessness as a 100 trillion Zimbabwean dollar note could barely be used to purchase a bus ticket. In the year 2008, hyperinflation in Zimbabwe hit 500 billion percent.
Zimbabwe Turns to Dollarization
Due to the complete collapse of its sovereign fiat currency, Zimbabwe’s leadership decided to adopt the US dollar as legal tender to stabilize the economy in 2009. Already in the years leading up to this, Zimbabweans started to accept other international currencies as tender, such as the British pound, the euro and, most commonly, the South African rand.
Mugabe’s cabinet believed that the dollarization of Zimbabwe would give the country an economic boost. However, critics of dollarization state that it is the giving up of monetary and exchange control to a larger state, an economic act of submission, which ties a nation to an uncertain system it has zero control over. While dollarization may help to improve international trade, it also gives up a degree of economic autonomy, which can harm a nation in the long run.
In 2015, the Reserve Bank of Zimbabwe officially discarded the Zimbabwean dollar and exchanged all cash holding on bank accounts into US dollars, with one US dollar being worth 35 quadrillion Zimbabwean dollars.
In an attempt to create some form of economic stability and to fight the shortage of currency, President Mugabe made the decision to launch a new local currency called ‘bond notes’ in what some describe as his “last gamble” to prevent a complete economic shutdown in his country.
The Reserve Bank of Zimbabwe (RBZ) started issuing ‘bond notes’ on November 28, which have an official value pegged 1-to-1 with the US dollar. From this week onwards, all cash withdrawn from ATMs will come in the form of the newly issued ‘bond notes’. However, the Zimbabwean population is very concerned that the new currency could lead to a repeat of the severe hyperinflation the country experienced in 2008 with the Zimbabwean dollar.
Zimbabwe’s acute shortage of currency is preventing teachers, doctors, public servants and soldiers from receiving their salaries. The latter is especially an area of concern for Mugabe as his power lies primarily with his control of the armed forces. Should the new ‘bond notes’ fall victim to hyperinflation, as many economists expect, this could see the military turning on Mugabe, and perhaps lead to the political demise of Africa’s longest standing head of state.
Looking at the situation, it is hard to see how the new ‘bond notes’ will not suffer from hyperinflation as there is little trust in the government’s statement that each bond note is backed by US dollars. If that were the case, the government could just continue to deal in US dollars. Instead, the government announced that the new “currency” will be launched partly because there are not enough US dollar notes circulating in the country.
However, you can purchase as many US dollar notes as you need from the Federal Reserve, which begs the questions of whether the Zimbabwean government is really able to back the new “currency” with US dollars. Furthermore, Mugabe’s government announced that the central bank will bring $10 million worth of new ‘bond notes’ into circulation, which is not near enough cash to support a $7 billion economy.
Could Bitcoin Become a Replacement?
Recent years have shown that when a country is entering economic distress and its currency drastically weakens, bitcoin adoption in the country increases. This has been the case in Venezuela, Bolivia, Brazil, and Turkey for example.
Not surprisingly, therefore, Zimbabwe also has a small but growing bitcoin community who see the value in an international decentralized digital currency. Zimbabwe’s bitcoin community also includes two leading African Bitcoin startups, the bitcoin exchange, and ATM provider BitFinance and the mobile bitcoin wallet and remittance service BitMari.
However, not only the budding bitcoin community in Zimbabwe believes that bitcoin could be a viable solution to the country’s currency woes. Philip Haslam, economist and co-author of When Money Destroys Nations, a book on living through the times of hyperinflation in Zimbabwe, also believes that bitcoin could be a possible solution to the country’s monetary challenges.
Haslam was quoted in a publication by the Institute of Security Studies stating that he is “excited about bitcoin as a stable currency alternative.” He further stated:
“If Zimbabwe establishes a privatized bitcoin national currency, if the market naturally went to a Bitcoin type currency, as other currencies around the world indicate weakness with money printing happening, you’d have a whole lot of currency flowing into Zimbabwe. Zimbabwe would transform from a basket case to a global banking center in a stable cryptocurrency. And that would be fairly quick.”
Haslam also suggests that adopting the South African rand as a currency would create more financial stability, as it would eliminate currency fluctuations for cross-border trade. Nonetheless, he believes that bitcoin would still be the best alternative as Bitcoin is both a currency and an international payments platform that allows for privatized banking.
From both an economic and political point of view, it will be interesting to see how the situation surrounding Zimbabwe’s new currency will unfold. Should Mugabe’s new ‘bond notes’ become a victim of hyperinflation and the country stumbles into further economic dismay, this will not only have harsh consequences for Zimbabwe’s population but could also mean the end of Robert Mugabe’s rule.