By Borgen Magazine

Photo by Borgen Magazine

“Zimbabwe’s economic difficulties have deepened. Drought, erratic rains, and increasing temperatures, have reduced agricultural output and disrupted hydropower production and water supplies. Economic activity is severely constrained by tight liquidity conditions resulting from limited external inflows and lower commodity prices,” the International Monetary Fund (IMF) says in its latest report on Zimbabwe.

The IMF, which has concluded a mission to Zimbabwe, has also reported that economic activity is severely constrained by tight liquidity conditions resulting from limited external inflows and lower commodity prices. Inflation remains in negative territory, because of the appreciating United States Dollar and lower commodity prices.

The US greenback is the country’s main currency after the country ditched its worthless currency several years ago amid record inflation running to trillion percentages. Zimbabwe remains in debt distress and the level of international reserves is low.

In an effort to ease the acute cash shortages, Zimbabwe’s central bank said it would start printing “bond notes” in denominations of $2, $5, $10 and $20. The country already has “bond” coins that represent U.S. dollar values. For each coin in circulation, there’s an equivalent U.S. dollar held in the country’s reserves.

The central bank has also limited withdrawals to $1,000 a day, and wants people to make more use of euros and South African rand. But the rand has lost 20% against the dollar in the past year, and some Zimbabweans are losing patience.

What went wrong?

Economic agents have lost trust in the financial system. In modern economies, movements of finances and consequently economic activities are built on trust. My spending is your income and your spending is my income. I need to have a few beers at a bar so that the owner can get the money he needs to afford the goods and services he consumes—we depend on each other. When people lose trust in the system, they spend less, and this means people earn less, which then results to less spending and the downward spiral continues. Also, if people aren’t spending, demand for goods and products falls which means that producers will have to layoff workers to cut down their losses. It is for this reason that unemployment in Zimbabwe is very high (some reports have it at 90%).

Why print local “US dollars”

It is important to remember that Zimbabwe lost control over its monetary policy (supply of money) the minute they introduced foreign currencies such as US dollar, Euro, and Rand. Essentially, it meant that the central bank became useless as it could not control the value of money—the value of the dollar is controlled by a lady Dr. Janet Yellen who is the Chairperson of the Federal Reserve Bank of the United States.

So as cash crunch bites, Zimbabwe has resolved to printing local “US dollars” in a move to control the supply of money.

What does Zimbabwe need?

Prayer! Zambia did it, and look where it got them. The Kwacha is not doing as bad as it used to.

In most economies, economic crises (high unemployment and weak export performance) result from financial crises. In Zimbabwe, the opposite seems to have happened, the economic crisis has caused a financial one which has exacerbated the economic crisis. So if the Government of Zimbabwe wants to solve the ongoing crisis, simply printing local US dollars won’t get them far, they need a complementary policy to solve the economic crisis. Policies to insure farmers against rain for instance might go a long way in solving the crisis than regaining control of monetary policy.