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May currency review

It's fair to say that, since Zimbabwe's government introduced a new currency (the RTGS dollar) in February, things haven't gone to plan. The official exchange rate diverged rapidly from black-market rates, as the Reserve Bank desperately tried to hold the RTGS$'s value. The confusion surrounding how much the currency was actually worth eroded trust in it, prompting retailers to increasingly set prices in US dollars instead and demand them for payment, worsening shortages of fuel and other goods, and adding to soaring inflation. Meanwhile the economy is shrinking again.

Things haven't gone to plan primarily because the plan wasn't coherent. The central bank said the RTGS$ would float freely, but it was immediately obvious that official exchange rates were being manipulated and overvalued. Authorities promised to build confidence in the RTGS$ but then carried on printing the money in ever-greater quantities. Suggesting that the new currency was only a temporary measure probably didn't help either.

In May the bank gave up the expensive attempt to hold the official exchange rate and let it depreciate, from RTGS$ 3.66 to RTGS$ 5.86 against the euro, making it the world's weakest currency during the month (see first table below). Unfortunately, black-market rates fell even faster, and now stand at around RTGS$ 8 / EUR 1.

To stabilise the situation, the government must either ditch its new currency, most likely by re-dollarising (adopting USD as the country's currency wholesale again), or somehow instil trust in it. The former action would bring immediate price stability, as it did in 2009 when official annual inflation fell from an estimated 75 billion percent to zero overnight. However, it would also wipe out people's savings in RTGS$, bring shortages of small denomination notes and coins, which keep local economies going, and take away monetary policy tools from the Zimbabwean authorities.

The second option, of restoring trust in the RTGS$, would be better, but it is easier said than done. However, hope arose on 31 May with the announcement of a landmark deal with the International Monetary Fund, which would require the Harare government to stop borrowing money to pay its bills and wages from the central bank, which has continually printed money for decades in order to lend it - a practice which has been the primary cause of Zimbabwe's long economic crisis, because it rapidly erodes confidence in the value of the currency involved.

Where the government will find alternative funds from is more difficult to work out, but the hope is that by stopping money printing, inflation will quickly fall, exchange rates will settle (and eventually converge), confidence in the RTGS$'s worth will rise, and investment might be attracted to get the economy - and tax revenues! - going again. It will be a difficult road, but the plan is definitely better than the last one.

Countries experiencing largest currency losses in May
Currency code Movement v EUR
29 Apr - 3 Jun 2019 (%)
Chile CLP -5 2.0
Colombia COP -4 3.2
Georgia GEL -4 4.1
Ghana GHS -5 9.5
Haiti HTG -7 16.8
Liberia LRD -13 23.3
Pakistan PKR -5 8.8
Venezuela VES -4 282972.8
Zambia ZMW -5 7.7
Zimbabwe RTGS -38 75.9

Another big faller this month, and a regular recently on this table, was the Pakistani rupee, which hit an all-time low against the US dollar, as its economic woes continue.

Elsewhere, as our latest cost of living survey has highlighted, the economic situation in Haiti is deteriorating fast. Inflation has been above 10% for several months now and the local currency is losing value. The main issue has been that crisis-hit Venezuela has cut access to cheap fuel. There has also been considerable unrest and protests demanding the resignation of the president Jovenel Moïse following reports of corruption have spooked markets, causing a sharp drop in the value of the Haitian gourde.

Guyana's economic fortunes are, hopefully, about to go the other way, on account of huge oil reserve finds. This BBC report shows how it could even become the world's richest country, but it will have to avoid the pitfalls many other oil producers have experienced, including so-called 'Dutch disease', whereby over-reliance on a single export can unbalance your economy and push up the value of your currency so much that it makes other potential export products uncompetitive. Certainly, investment and expatriation to Guyana are increasing rapidly. ECA will, as always, be there to observe how things develop.

Iran could soon knock four zeroes off its currency notes, but be aware that this reform has been announced previously and didn't then materialise.

Is Facebook about to launch its own currency? We'll definitely be keeping an eye on this story, as one day a cryptocurrency like Facebook is proposing could well become a useful tool in expatriate remuneration. 

Only two currencies gained more than 2% against the euro in May:

Countries experiencing largest currency gains in May
Currency code Movement v EUR
29 Apr - 3 Jun 2019 (%)
Japan JPY +3 0.9
Mozambique MZN +4 3.3

And finally, here is this month's selected currency movements table:

Selected currency movements (v EUR)
Country Currency code % movement to 3 June 2019 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS +1 -10 -15 -42 55.8
Australia AUD -2 0 -4 -4 1.3
Brazil BRL 0 -3 -1 -1 4.9
Canada CAD -1 0 0 0 2.0
Chile CLP -5 -6 -4 -7 2.0
China CNY -3 -1 +2 -3 2.5
Egypt EGP +2 +6 +8 +11 13.0
India INR +1 +4 +2 +1 2.9
Indonesia IDR -1 +1 +2 +1 2.8
Japan JPY +3 +5 +6 +5 0.9
Kenya KES 0 +1 +3 +5 6.6
Korea Republic KRW -3 -4 -4 -6 0.6
Mexico MXN -3 0 +5 +6 4.3
Nigeria NGN 0 +2 +3 +4 11.7
Norway NOK -1 0 0 -2 2.9
Philippines PHP 0 +1 +2 +5 3.0
Poland PLN 0 0 0 +1 2.2
Russia RUB -1 +3 +4 0 5.2
Singapore SGD -1 0 +1 +2 0.8
South Africa ZAR -2 -2 -5 -11 4.4
Sweden SEK 0 -1 -3 -3 2.1
Switzerland CHF +2 +1 +1 +3 0.7
Turkey TRY +1 -7 -11 -22 19.5
United Kingdom GBP -2 -3 +1 -1 2.1
United States of America USD 0 +2 +2 +4 2.0
Venezuela VES -4 -41 -96 -99 282972.8
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