February currency review

When is a currency not a currency? Zimbabwe's long-suffering people may soon find out.

Having struggled to manage what has been the world's most complex currency set-up in recent years, the Reserve Bank of Zimbabwe last week tried to simplify things by introducing a new one. Except that, it isn't calling it a currency, but an "inter-bank foreign exchange market", and says it plans to introduce yet another new currency, a genuine one this time, within 12 months.

Nevertheless, the RBZ is hoping the RTGS dollar, as the new non-currency is called, will act like a currency (it certainly sounds like a currency!) and help to straighten out some of the imbalances distorting Zimbabwe's economy. It is effectively an amalgamation of two distinct parts of the outgoing currency arrangements, namely 'bond notes' (actual physical currency introduced as a surrogate for scarce US dollars, which have been the main currency in use in the last decade but without enough in circulation) and 'RTGS' (the commonest form of electronic payment, mainly via debit cards). Bond notes will still circulate (there will be no RTGS$ notes and coins, apparently) and debit cards will still be the most popular payment means, but the two will become one under the RTGS$ name, commanding the same exchange rate and the same prices in shops, or so it is hoped.

One of the main difficulties for the economy has been the fact that different methods of payment have forced businesses to demand different prices for the same goods, depending on how much they felt they could trust the form of money being offered by customers. Bond notes were particularly shunned because the government insisted that they weren't a currency either, but just a substitute for US dollars whose value they should therefore share. Zimbabwe's people, having had their fingers - and savings - burned by their own government several times in recent history, disagreed, and the highest prices in shops were reserved for those paying with bond notes. Black-market exchange rates for bond notes, which were being printed in increasingly liberal fashion to meet the state's spending needs, became incredibly volatile and moved far from par with the US dollar. If you can't work out what your money is worth it is impossible to price goods properly. Playing it safe means erring on the high side. Such has been the uncertainty that inflation has soared from only 4.3% six months ago to 56.9% as of January 2019.

If your own people don't want the money you print for them, then foreigners won't either, so Zimbabwean importers haven't been able to use bond notes to buy in goods from abroad. With dollars and other hard currencies in such short supply because of Zimbabwe's lack of exports (a legacy of decades of economic mismanagement), shortages of imported items (fuel is particularly scarce) have become acute, adding to price pressures.

Will the new system improve things? It might if the RTGS dollar's exchange rates are allowed to reflect market sentiment, as the RBZ says they will. That way it could find fair value and stability, promoting the predictability that people and businesses have so sorely lacked in recent years. The trouble is, the bank, fearing even worse inflation, and despite its promises of market-led rates, has so far fixed the exchange rate at USD 1 / RTGS$ 2.50, making it already significantly overvalued compared to rates available on the black market (latest USD 1 / RTGS$ 3.50). If people have any faith in the new 'currency' it is unlikely to last for long, especially as devaluations could soon follow, because fixing exchange rates at too high a level is extremely costly in terms of foreign exchange reserves - and Zimbabwe's are already dangerously low.

So, when is a currency not a currency? When nobody trusts it. The RBZ needs to quickly give Zimbabwe's people reason to do that.

The Ghanaian cedi was the world's weakest currency in February, as the chart above shows. Partly, at least, Ghana is a victim of  its own success. High demand locally for dollars and other hard currencies in order to pay for imports as the economy grows fast is driving down demand for cedis and their value is dropping.

Very few currencies gained significantly against the euro in February, with only two rising 3% or more:

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