C&B Notes

Zimbabwe: Back to the Future?

After officially retiring its previous local currency only a little more than a year ago as part of its dollarization policy, Zimbabwe is issuing bond notes to solve its shortage of U.S. dollars.

Zimbabwe’s central bank said it will start issuing on Monday $10 million in so-called bond notes, a parallel currency meant to alleviate a severe shortage of U.S. dollars in the country.  Anger over the impending introduction of the bond notes — which many Zimbabweans fear are a first step toward reissuing a national currency — has been boiling in recent months, erupting in some of the biggest antigovernment protests the country has seen in years.  That has added to concerns over the political stability in this southern African country, as President Robert Mugabe, who at 92 is the world’s oldest head of state, becomes increasingly frail.  An important union of vendors immediately warned Saturday that smaller shops and street traders won’t recognize the notes and called for more demonstrations…

The country started using the U.S. dollar in 2009, after years of hyperinflation severely devalued its own Zimbabwean dollars.  At its height, the central bank was issuing $100 trillion notes, which soon paid for a bus ticket.  Although Zimbabwe officially accepts a basket of foreign currencies — including the South African rand, the British pound and the euro — U.S. dollars have become the dominant tender by far.  In recent months Zimbabwean banks have been running out of U.S. dollars as imports collapsed and flows of cash out of the country increased.  Lenders have set withdrawal limits of as little as $20 a day and hundreds of Zimbabweans have taken to sleeping in front of bank offices in the hope of getting their hands on dollars ahead of the introduction of the bond notes.

The Reserve Bank of Zimbabwe said Saturday that initially it will issue $10 million in $2 bond notes, along with $2 million in $1 bond coins.  Bond coins have been in circulation for more than a year, but until now the largest denomination was 50 cents.  The bond notes and coins are pegged 1:1 to the U.S. dollar, the bank said, adding that it had engaged with retailers, fuel companies and other business representatives to ensure that they would accept the notes at face value.  In total, the central bank hopes to issue $200 million in bond notes, which is says are backed by a credit facility from the African Import and Export Bank.  The bond notes have sparked fears among Zimbabweans that the government will soon fire up the printing presses again, causing a return to hyperinflation.  Many ordinary citizens lost their life savings when their money devalued significantly and was eventually converted to dollars at next to nothing.

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