Re-dollarisation or Bitcoin, which way?

In the last article, I chronicled some of Zimbabwe’s economic troubles post-dollarization of the economy in 2009. It appears the economy is heading for another implosion unless some steps are taken calm restive workers and the pressure from businesses. Currency depreciation and money supply growth are the prime causes of the economic downturn.

Government’s penchant for living outside its means is amply identified as the root cause of the current economic troubles. Rent seeking by inefficient farmers and companies alike, further exacerbate the problem. To cure this problem permanently, a new, out of the box thinking is need. Businesses and ordinary folks must take the lead in any such shift in thinking and there is no better place to start than crypto-currencies.

Crypto-currencies potentially give Zimbabweans the opportunity to escape the unending cycles of economic depressions. Zimbabwe has hard working and resilient people but their efforts are often undone by acts outside their control. However, by adopting Bitcoin, a decentralized and borderless currency, citizens gain a measure of control as well as the ability to preserve value and maintain a decent standard of living, irrespective of whether government floundering or not.

Inflation—a combination of money supply growth plus currency depreciation—is particularly unfair on ordinary citizens. They are often hit hardest and rarely are there any safety nets or options for escaping. In 2008, when Zimbabwe’s inflation reached a crescendo, hundreds of thousands lost value as banks demonetized local currency bank balances. There was no insurance to cover losses at the bottom end of the chain, lifetime savings were lost. In 2009, people had start from scratch.

Pensioners were not spared either, years of making contributions counted for nothing when the economy dollarized. Pensioners received shocking payouts following a controversial process of converting Zimdollar contributions to US dollars. Apparently, hyperinflation had rendered local currency contributions almost worthless.

By adopting crypto-currencies like Bitcoin, Zimbabweans will be able to protect their pension contributions and savings from inflation and depreciation of a currency. That responsibility rests solely with ordinary people and not institutions like the Insurance and Pensions Commision (IPEC) or even government. In fact, there is a precedence of something like this happening before.

For instance, while dollarization was formally adopted in 2009, an informal dollarization process had begun much earlier and government had hitherto, resisted this. Laws barring the use of foreign currency by ordinary people were enacted but the arrests that followed failed to stop the practice. As many people understood the cost of inflation to their incomes, many began rejecting the Zimdollar despite the risk of arrest or even jail time.

By the end of 2008, it had become clear, dollarization was not only inevitable but it actually worked. So government had no option but to follow the lead of ordinary people. Bitcoin can similarly be adopted if enough people are made aware of the option it gives them.

With respect to Zimbabwe companies, the widespread use of an inflation-proof Bitcoin means, values will be preserved as there is little or no chance of debasing this currency. Companies want to operate in an environment that is stable and with optimal regulation, something that is often absent with Zimbabwe’s economy.

As explained in the last article, when Zimbabwe dollarized, it was understood to mean the dormancy of the unpopular central bank during the subsistence of this currency regime. Yet a few years later, the bank has somehow managed to issue treasury bills over currencies it does not print or preside over. 

The result has been devastating for businesses, vital foreign currency has essentially disappeared from circulation, leaving the so-called Bondnotes as the only currency widely available.

This currency, which is issued by Reserve Bank of Zimbabwe, is susceptible to the shocks that come with the growth in money supply. 

After several years of almost static prices, inflation began to accelerate as more and more treasury bills were issued. By the end of November 2018, inflation had gone from below 5% for much of the dollarization era to just over 30% although John Hopkins Professor of Applied Economics, Steve Hanke, reckons its way above 100%.

In many ways, what is happening now is a repeat of what occurred between 2004 and 2008, but only this time, it has happened under currency regime many thought was safe.

The idiom—once bitten, twice shy—has seemingly failed to apply to Zimbabwean businesspeople as the unfolding second round of hyperinflation takes its toll on business operations across the whole economy.  Business leaders were perhaps naïve in believing that central bank would not resume duties under the current currency set up. But in fairness, they have never given much thought about the alternatives to fiat currencies.

At this point, Zimbabwean companies must find ways of surviving the turbulence now while also taking steps to pre-empt a third round of government induced hemorrhage of value in the foreseeable future.

As already shown in many previous articles, Bitcoin or alt coins, do provide that break Zimbabwean companies might be looking for because these digital coins eliminate inflation from the equation. The Blockchain technology that underpins Bitcoin, makes it almost impossible for anyone, including developers of the software, to manipulate the amount of the digital currency in circulation. 

By trading in this currency, companies will be confident that no-one will debase this currency hence there is no inflation risk. Without inflation companies and economies grow.

Choosing to trade in crypto-currencies should not be seen as a challenge to the state, but a statement expressing exasperation with the way national currencies are managed.

A monopoly is something that is not ideal and that is why governments around the world have laws that seek to regulate or to even break up such powerful organizations. It should then follow that currency issuing monopolies be subjected to similar laws since their actions or decisions result in far much worse problems to ordinary people than acts by regular commercial monopolies.

Zimbabwe is a clear case study that proves the need for an alternative system.