The authorities in the southern African nation of Zimbabwe said on Wednesday that the country will print a new local version of the U.S. dollar as part of efforts to ease a worsening severe cash shortage.
According to a press release by the country’s central bank governor John Mangudya, Zimbabwe will print bond notes in $2, $5, $10, and $20 denominations backed by $200 million provided by the Africa Export-Import Bank (Afreximbank).
The bond notes that will have the same value as the U.S. dollar are presently in the “design stage,” according to the authorities, and will be issued “within the next two months.”
The country’s severe cash shortage followed a decision taken in 2009 by the authorities to abandon the country’s currency, the Zimbabwean dollar, due to hyperinflation that rendered the use of the national currency impracticable. Hyperinflation became so rampant that the largest denomination issued was a $100 trillion note.
Zimbabwe’s hyperinflation became the second worst case in history after Hungary’s post-World War I inflation, according to the Washington Post. Runaway inflation reached an annualized rate of 89.7 sextillion (21 zeroes) percent.
In practical terms, this meant that people had to carry wheelbarrow loads of money to the market to buy common provisions such as salt, tomatoes, and soap.
As the inflationary trend spiraled out of control, the authorities had to remove 12 zeros from the local currency. But when even that did not help, with ATMs and calculators unable to process the huge zeroes involved in daily transactions, the country gave up and abandoned the Zimbabwean dollar altogether.
After the country ditched the local currency, Zimbabweans have used foreign currencies such as the U.S. dollar, the British sterling, the Chinese yuan, the South African rand, and, to a lesser extent, the Indian rupee and the Euro.
The U.S. dollar became the most widely used and accepted currency due to concerns about the stability of the value of the South African rand. People preferred to hold the U.S. dollar despite the fact that the South African rand was more readily available — South Africa being the country’s biggest regional trading partner.
The preference for the U.S. dollar, combined with a trade deficit, led to a severe shortage of the foreign currency in the country. Zimbabwean bank customers were often unable to withdraw the amount of cash in U.S. dollars that they needed.
The authorities took the decision to print a local version of the U.S. dollar to ease the foreign currency shortage.
According to the Zimbabwe Herald, the central bank emphasized in the press release that the decision to issue new bond notes pegged to the U.S. dollar and backed by $200 million dollars from the Africa Export-Import Bank should not be construed as an initial step towards reintroducing the old national currency that was abandoned in 2009.
“This does not signal the reintroduction of the Zimbabwe currency. This is just a measure to curb illicit flows out of the country.”
As part of efforts to encourage people to hold the new bond notes and also encourage increased use of the South African rand, the central bank announced a number of measures, including a restriction on the amount that people are allowed to take out of the country to US$1,000 and 20,000 rand.
A restriction of US$1,000 per day has also been imposed on ATM and cash withdrawals from banks. But according to the Guardian, some banks have limited the amount that customers can withdraw to $200.
Some experts have criticized the decision by the authorities.
An economist, John Robertson in Harare, said, “This is extremely damaging to the interests of everyone and very dangerous to the economy. It won’t be long before this becomes another inflation story. People will refuse to be paid their wages in bond notes. Shops will not accept them as they cannot be used to restock [from abroad]. I am hoping that the government can be talked out of it.”
The introduction of the bond notes follows the introduction of bond coins in denominations one, five, 10, and 25 cents, also pegged to the U.S. dollar, in 2014.
Zimbabwe faces worsening economic crisis under the authoritarian rule of 92-year-old President Robert Mugabe. Mugabe has ruled the country since the end of white minority rule in 1980.
[Photo by Tsvangirayi Mukwazhi/AP Images]