Zimbabwe’s currency troubles should inspire mass adoption of crypto-currencies

The protests and violence that rocked Zimbabwe recently stem from the abuse of the flawed fiat money system. Pressure had been building up, depreciation of currency had eroded disposable incomes in an economic environment of prevalent price increases.

The massive fuel price increase on the 12^th January was the final nail in the coffin. Diesel jumped from about $1.30 local to $3.11, a 140% increase.

Businesses responded by increasing prices twofold while public transport operators took advantage by hiking fares by rates much higher than the 140% fuel price hike. This left workers in a much worse position than they were before the increases.

So what exactly what led to this desperate situation, when only ten years ago Zimbabwe was emerging out of another economic malaise?

Well, a few years ago, Zimbabwe’s government engaged in a form of money creation—Treasury Bills issuance and overdraft facilities with central bank —and this culminated in the ballooning domestic debt.

After the end of the coalition government, which many credited for dollarizing as well as stabilizing of the economy, the new government resuscitated deficit spending and a general fiscal indiscipline, practices that had been curtailed in the previous government. Treasury Bills issuing was at the core of this deficit spending.

Prior to this, the re-introduction of exchange controls in 2013, had precipitated the gradual withdrawal of the US dollars and other currencies from the financial system. The so-called multi-currency regime, a system where a basket of foreign currencies are accepted as legal tender remains in place regardless.

By in its own reckoning, Zimbabwe does not have a currency or at least did not have a form of local currency when treasury bills issuing began. So in principle, the country could not issue treasury bills because that would be equal to counterfeiting. Zimbabwe did anyway and the treasury bills have now found their way into the banking system.

Suddenly, the country’s financial system now has to contend with billions of dollars whose value is not backed by anything despite the ominous attempts to equate them with actual US dollars. The billions are akin to a giant bubble because the country does not have enough foreign currency reserves or an economic activity to support their purported value.

Economists like to use this adage—bad money drives out good money—when rationalizing the rejection of one currency in favour of another by economic agents. This is exactly what happened when government forced the return of local currency, which is the bad money in this case and this resulted in foreign currency, the good money, leaving the formal economy.

People had no confidence in the new local currency, the Bondnotes, which government pegged at par with the US dollar. So as soon as Bondnotes were introduced, a parallel market for those who wanted to buy the US dollars with the new currency immediately sprang up.

As the shortages of foreign currency in the formal system worsened, the parallel market exchange rate increased against the Bondnotes. The billions that government created could only be liquidated at a massive discount.

In other words, local currency had to be devalued proportionate to the bubble of billions trapped in the banking system. This can only be done at the rates determined by markets and not at the absurd government stipulated rate of one Bondnote being equal to one US dollar.

The market rate, which is commonly referred to as the parallel market rate, has determined that the actual rate as one US dollars to three Bondnotes (1:3).

The government is acutely aware that Bondnotes are not equivalent to the US dollars but for purposes of furthering its expedient agenda, has maintained an opposite stance in public. This stance may be motivated by a more sinister but legal desire to pass on the burden of the country’s version of quantitative easing (state sanctioned counterfeiting) to the masses.

By 2015, these acts of creating money without a commensurate increase in national output, began to trouble government. Ultimately, this resulted in the launch Bondnotes in late 2016. Bondnotes as well as bank RTGS balances were supposed to absorb the giant bubble arising out of the runaway domestic debt.

The only problem so far has been the resistance by the masses. The strikes or intention to strike by government workers highlights this resistance. People are well aware of how Bondnotes can lose value quickly, hence the demand for salaries to be paid in US dollars.

On the other hand, government which had hitherto, maintained a facade that local currency is at par with US dollars, faced challenges of its own. Since government insisted that Bondnotes are at par with the US dollar, this forced it to heavily subsidize the price of fuel.

Landlocked Zimbabwe’s fuel became the cheapest in the region yet the country is a net importer of fuel. Regional traders were now importing fuel from Zimbabwe and selling this in their respective countries at a substantial profit. As figures from Zimbabwe statistical agency, Zimstat showed, the country’s import bill for this commodity grew by some 40% in 2018.

Zimbabwe was now subsidizing fuel for the region thus creating this extra demand. Finally, government could not sustain this consequently it responded with the sharp price increase.

This was the trigger that the restive population had been looking for and they responded with violent protests.

Now the wheels have definitely come off, the effects of quantitative easing are threatening to plunge the country into a civil conflict. Zimbabweans lost the last time out when the central bank printed money with such reckless abandon, culminating in the collapse of the Zimdollar in 2008. This time workers are a little wiser, they want to be paid in foreign currency or at least they want disposable incomes indexed with inflation.

Yet there is a better way of dealing with the excesses of both government and the central bank without resorting to violent protests as we saw in Zimbabwe. Crypto-currencies like Bticoin, Ehteruem, AWG are innovations created exactly for the situations like that in Zimbabwe, where there is no transparency in the creation of money.

Unlike central banks’ fiat currencies, digital currencies are anchored on a publicly distributed ledger or Blockchain, which is temper proof. There is a slim possibility of quantitative easing because each new currency addition will have to be verified before it starts circulating.

Better still, the intense competition between various crypto-currencies creators engenders confidence because rivalry often leads to better and secure currencies. In the case of Zimbabwe, the adoption of crypto-currencies will lead to lower transaction costs and seamless cross border payments. Inflation will be eliminated if the right crypto-currency or token is adopted.

There are far too many advantages for using crypto-currencies and countries should not wait until the last minute before they adopt. Zimbabwe’s troubles should be a wake-up call to those who live in countries undertaking similar practices. In the end, the mass adoption of crypto-currencies will benefit everyone including central banks and government that are presently opposed to privately issued crypto-currency.