Opinion / Columnist
Are the $Bond notes chasing the $USD
14 Jun 2017 at 16:23hrs | Views
As old as about 5 centuries, the Gresham's Law remains a fact. When two or more kinds of money of unequal exchange value are in concurrent circulation, each being available for payments, the other one with inferior value tends to drive the one of higher value out of circulation. (Sir Thomas Gresham)
It has been over 7years since dollarization in Zimbabwe which boosted the economy that had collapsed prior to the record breaking 'world's 30th hyperinflation' ever that saw Zimbabwe to its knees. The introduction of the multi-currencies (led by the USD) revived the economy despite the slowly leakages of the USD leading to the severe money shortages which led to the introduction of the 'Bond Notes'.
Some analysts have argued that the USD has too high value to be used for exchange and circulation in an economy like Zimbabwe. Economists predicted the future money shortages but none came up with viable alternative other than the bond notes in which the return of the Zimbabwean dollar could have been catastrophic in this economy hanging by a thread.
For a country like Zimbabwe which has over 80% of its population depending on the informal sector market (to a certain extent), a hard currency like the USD can be easily harvested since it is freely circulating in the economy. This boosted the black market as the government reported a 400million leakage of the USD from the circulation in the Zimbabwean GDP. Also with the country's yearly trade deficit money shortages are inevitable.
However, the rate at which the USD was leaking from the economy before the Bond Notes introduction was extreme and the government had to introduce certain restriction regulations to keep the economy afloat, such as the daily and monthly withdrawal limits. The Gresham's Law was also reason enough for the disappearance of the USD from the circulation in the Zimbabwean economy, following the multi-currency use. People tend to demand more of a high value currency (termed the 'good money'), than the lower value currency (the 'bad money) if there is concurrent use of two currencies with unequal value. The 'good money' is often preferred, hence saved or taken off the circulation whilst the 'bad money' is exchanged.
In 2014, the government introduced the Bond Coins. The coins promoted the use of a single currency limiting the use of South African Rand (ZAR) as an aid to exchange using the USD. The Bond coins had gone a long way to reducing the amount of ZAR in circulation as a way of reducing 'bad money' but about two years later, the shortage of the USD had become extreme that the Bond Notes had to be introduced by the government.
In 2016 the government proposed the use of a form of a 'greenback' with the same face value as the shortages were escalating. The idea received a lot of criticism but the reason had been understood. It was a viable temporal solution to shortages of money in the economy as the people could not access their money in the bank without swiping. The government had limited the withdrawals and still the banks had no money to give the people. The bank and the 'atm' queues increased and the people were becoming impatient, something had to be done. In December 2016, the Bond Notes were introduced in the economy of Zimbabwe. As fiduciary money, the bond notes are secured by 200million credit money from the African Bank.
The government regulated an exchange rate of 1:1 for the USD and the Bond Notes and cannot be used outside Zimbabwe. The regulated exchange value of the Bond Notes is now less than the actual value (in the black market) as the USD continues to disappear. In some informal sector where regulations are strict, the Bond Notes are equal to the USD but are of less value when there are cross rated. The Bond Notes are worth about 90% of the USD at a rate of USD 1 : BN 1.1 or BN 1 : USD 0.91 in the black market.
The demand for the USD exceeds its supply whilst the trade deficit that further leads to shortage of the USD in the money circulation. Our country imports more than 5 billion USD whilst we export about 4 billion USD yearly. Nearly all the USD has been wiped from the economy as the 100 million bond notes in the economy are also failing to serve the economy with the shortage of money increasing about 7 months after the issue of the Bond Notes.
Does the Bond Notes chase the USD from the economy? The face value of the Bond Notes is equal to the value of the USD as regulated by law. However the informal sector has increased the price of the USD due to its shortage and use without international boundaries. The Gresham's law states that the bond notes are also to blame for the disappearance of the USD. What does the future hold for the Zimbabwean economy in terms of the currency? Are we waiting for the economy to stabilize? Personally I see no efforts from the economists who should be drafting the present and the future solutions to the economic misfortunes.
Tryson G. Dube is a student at National University of Science and Technology
It has been over 7years since dollarization in Zimbabwe which boosted the economy that had collapsed prior to the record breaking 'world's 30th hyperinflation' ever that saw Zimbabwe to its knees. The introduction of the multi-currencies (led by the USD) revived the economy despite the slowly leakages of the USD leading to the severe money shortages which led to the introduction of the 'Bond Notes'.
Some analysts have argued that the USD has too high value to be used for exchange and circulation in an economy like Zimbabwe. Economists predicted the future money shortages but none came up with viable alternative other than the bond notes in which the return of the Zimbabwean dollar could have been catastrophic in this economy hanging by a thread.
For a country like Zimbabwe which has over 80% of its population depending on the informal sector market (to a certain extent), a hard currency like the USD can be easily harvested since it is freely circulating in the economy. This boosted the black market as the government reported a 400million leakage of the USD from the circulation in the Zimbabwean GDP. Also with the country's yearly trade deficit money shortages are inevitable.
However, the rate at which the USD was leaking from the economy before the Bond Notes introduction was extreme and the government had to introduce certain restriction regulations to keep the economy afloat, such as the daily and monthly withdrawal limits. The Gresham's Law was also reason enough for the disappearance of the USD from the circulation in the Zimbabwean economy, following the multi-currency use. People tend to demand more of a high value currency (termed the 'good money'), than the lower value currency (the 'bad money) if there is concurrent use of two currencies with unequal value. The 'good money' is often preferred, hence saved or taken off the circulation whilst the 'bad money' is exchanged.
In 2016 the government proposed the use of a form of a 'greenback' with the same face value as the shortages were escalating. The idea received a lot of criticism but the reason had been understood. It was a viable temporal solution to shortages of money in the economy as the people could not access their money in the bank without swiping. The government had limited the withdrawals and still the banks had no money to give the people. The bank and the 'atm' queues increased and the people were becoming impatient, something had to be done. In December 2016, the Bond Notes were introduced in the economy of Zimbabwe. As fiduciary money, the bond notes are secured by 200million credit money from the African Bank.
The government regulated an exchange rate of 1:1 for the USD and the Bond Notes and cannot be used outside Zimbabwe. The regulated exchange value of the Bond Notes is now less than the actual value (in the black market) as the USD continues to disappear. In some informal sector where regulations are strict, the Bond Notes are equal to the USD but are of less value when there are cross rated. The Bond Notes are worth about 90% of the USD at a rate of USD 1 : BN 1.1 or BN 1 : USD 0.91 in the black market.
The demand for the USD exceeds its supply whilst the trade deficit that further leads to shortage of the USD in the money circulation. Our country imports more than 5 billion USD whilst we export about 4 billion USD yearly. Nearly all the USD has been wiped from the economy as the 100 million bond notes in the economy are also failing to serve the economy with the shortage of money increasing about 7 months after the issue of the Bond Notes.
Does the Bond Notes chase the USD from the economy? The face value of the Bond Notes is equal to the value of the USD as regulated by law. However the informal sector has increased the price of the USD due to its shortage and use without international boundaries. The Gresham's law states that the bond notes are also to blame for the disappearance of the USD. What does the future hold for the Zimbabwean economy in terms of the currency? Are we waiting for the economy to stabilize? Personally I see no efforts from the economists who should be drafting the present and the future solutions to the economic misfortunes.
Tryson G. Dube is a student at National University of Science and Technology
Source - Tryson G. Dube
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