Zimbabwe is running out of cash and needs to print more money—so its central bank will print a new currency pegged to the U.S. dollar.
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July 22, 2017 – Free MCAT CARS Practice
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Zimbabwe is running out of cash and needs to print more money—so its central bank will print a new currency pegged to the U.S. dollar. The move has led to fears that the southeast African nation will soon abandon its multicurrency system and return to the hated local currency.
Zimbabwe has used the U.S. dollar since 2009 to substitute its own failed money, the Zimbabwe dollar. It also uses the South African rand, the euro, and the Chinese yuan, alongside the dollar. However, because Zimbabwe has run a trade deficit for several years, importing more than it exports, the country is literally running out of paper money.
In 2015, for example, it imported $5.5 billion in goods and only exported $2.5 billion. (The country’s economic problems are so bad it even had to sell off some of its wildlife.) That $3 billion trade deficit means the country’s supply of physical dollars continues to decrease. Zimbabweans can’t withdraw money from the bank because there isn’t enough of it—and banks have limited withdrawals at some ATMs.
To combat the shortage, Zimbabwe’s central bank will design and circulate new two-, five-, 10-, and 20-dollar “bond notes” that will be worth the equivalent of the U.S. dollar, but won’t actually be certified American currency.
Those notes won’t be worthless, however. Zimbabwe’s version of the dollar will be backed by $200 million in support from the African Export-Import Bank, a Cairo-based institution that promotes trade within the continent. Zimbabwe, then, will produce $200 million worth of new bills.
Among other measures announced this week to address the monetary problems: Officials have limited the amount of money that people can take out of the country to $1,000; and the central bank will convert 40 percent of all bank deposits that come from exports to the South African rand, and an additional 10 percent to euros.
The dollar is used as the official currency in other countries, as well. El Salvador, the Marshall Islands, the Federated States of Micronesia, Palau, and the islands of the Caribbean Netherlands—Bonaire, Sint Eustatius, and Saba—all use the dollar as their official currency.
Other countries have also adopted the dollar as their currency, but issued their own coins that are valued the same as American dimes, quarters, or nickels. Panama, East Timor, and Ecuador use American paper money, alongside their own individual coins. Similarly, since 2014, Zimbabwe has designed and circulated one-, five-, 10-, and 25-cent “bond coins” that are set to the value of the U.S. dollar. The coins bear little resemblance to their American counterparts. Zimbabwe’s new paper money will be made in the same vein.
Zimbabwe made the switch to the U.S. dollar in 2009 after its currency virtually had no value from over-printing and its economy collapsed following policies instituted by the government of longtime President Robert Mugabe. During that period, Zimbabwe produced 100-trillion-dollar notes. It got so bad that by the end of 2008, the inflation rate was 79.6 billion percent. By then, 1 U.S. dollar equated to 2.6 decillion (1033) Zimbabwean dollars.
Seven years later, the country isn’t facing hyperinflation, where there’s too much currency, but deflation, as there’s not enough physical cash around.
“It’s an indication of the lack of confidence in the Zimbabwean Central Bank,” says Russell Green, an international economics fellow at Rice University’s Baker Institution. “They want to print their own money, but they know that they’ve gotten in trouble in the past printing their own money.”
The absorption of the U.S. dollar as a country’s own currency, or even the attachment of its currency rate to the dollar, has previously proved perilous to other countries. Argentina’s peso had a fixed exchange rate to the U.S. dollar, and for a decade every one peso was equivalent to one dollar. However, after an economic depression that lasted from 1998 to 2002, which led to the fall of the government and a $95 billion default on its foreign debt, Argentina dropped the fixed exchange rate. Argentina’s central bank ran out of money during that time.
“The problem that all of these countries have, whether it’s with a complete dollarization or with a pegged currency, is if they’re running persistent trade deficits, eventually you run out of the foreign currency,” Green says. “That’s unfortunately Zimbabwe’s case.”
Keeping the dollar may not be a worthwhile option for Zimbabwe moving forward if it continues to need to print more money with the support of outside institutions. It may even have to go back to its old currency—a move many Zimbabweans fear.
Adapted from theatlantic.
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