After a deal to import hard currency from the US fell through, a report about the trial printing of new Zimbabwean dollars caused a stir.

South Africa’s watchdog newspaper, Mail & Guardian, reported on April 11 that ‘impeccable sources’ (an unnamed banker and two top civil servants) confirmed to its journalists that Harare is contemplating a return for the local currency which was abandoned in early 2009. Apparently, Fidelity Printers & Refiners – the largest security and commercial printing company in Zimbabwe – printed some Zim dollar notes near the end of last year, some valued as ‘high’ as 10 million Zim dollar.

The motivation behind this move is the country’s shortage of hard currency. The multi-currency system is dependent on the inflow of cash from abroad, and the economy’s massive current account deficit translates into outflows depleting the local money supply.

Broad (M3) money supply was estimated by the central bank at 3.9 billion dollars during January; put differently, this equated to a low 275 dollars per capita. The Reserve Bank of Zimbabwe added the Australian dollar, Chinese yuan, Indian rupee, and Japanese yen to the local multi-currency system earlier this year in order to increase hard currency options.

Bloomberg reported on April 23 that three members of the ruling party’s decision-making body confirmed to it via telephone interviews that the ruling party’s top leadership is weighing the reintroduction of the national currency that was abandoned early in 2009. ZANU-PF’s politburo is trying to decide whether it will do more harm to their image by reintroducing the Zimbabwean dollar, and indicated that a majority of politburo members are currently against its reintroduction. Constrained liquidity was already a factor some 12 months ago when President Robert Mugabe’s party campaigned for the July 2013 elections with the promise of bringing back the sovereign currency.

Speculation about a return of the Zimbabwean dollar has been perennial over the past five years. However, news of last year’s test print, the impending (backdated) increase in civil servant remuneration, and debate about currency matters in the highest echelons of ZANU-PF policymaking, signal that rumours cannot be ignored this time. From a somewhat misguided perspective, the easiest way to fund higher state salaries, on the one hand, and reintroducing a sovereign currency into the multi-currency system, on the other hand, is to combine the two moves into one.

This will certainly not be popular amongst donor agencies, rural folk (who are experiencing the biggest liquidity constraints), and multilateral organisations. Indeed, it would be wise to involve the International Monetary Fund in any such currency developments lest the outcome is as horrid as the hyperinflation situation of 2007-08. And even if nothing tangible comes of these continued rumours they still cannot be ignored – consumers, investors and multilateral organisations will not like the debate.

One of the by-products of the country’s constrained currency liquidity was low inflation readings during 2013 that turned into deflation early in 2014.

The benchmark consumer price index declined by 0.91 per cent year-on-year during March from February’s dip of 0.48 per cent year-on-year. The Zimbabwean economy started the year off with an acute shortage of paper money after urbanites during 2010 to 2013 became accustomed to the reasonable availability of cash. The country experienced a shortage of money at bank branches and automatic teller machines, resulting in violence linked to consumer frustration.

The February edition of the Treasury’s ‘State of the Economy Report’ stated that sales of consumer goods were reported to have fallen by up to 30 per cent month-on-month during February, “reflecting intensification of the liquidity crisis in the economy.” This is a massive drop in household expenditure and can partly be explained by 1) a disappointing start to the tobacco auction season; 2) some banks not having enough hard cash to service customers wanting to withdraw salaries; 3) some seasonal factors after holidays ended and schools started during January; and 4) February having three days less than January.

From a financial markets perspective, Zimbabwe does not have government debt instruments, credit default swaps, or a sovereign currency to measure financial markets’ changing opinion of the country, leaving the local stock market as the best alternative for gauging investor views on the outlook for local businesses. The Zimbabwe Stock Exchange’s Industrial Index declined to a 15-month low during mid-April and has closed higher in only one out of three trading sessions in 2014 so far, as investors lost faith in the local economy. Shares in OK Zimbabwe (the largest consumer goods stock listed on the bourse) are down 25 per cent since late-November.

Minister of Finance and Economic Development Patrick Chinamasa said on April 16 that the country was ready for a major shift in policy to arrest an economic decline that appeared terminal. However, the fundamental problem in rebuilding Zimbabwe’s economy is overtly political and resides almost exclusively in ZANU-PF and President Mugabe. What the ruling party will attempt to do is tinker with the system – e.g. reintroduce the Zimbabwean dollar – and hope it produces results. It will not. The real issue is how far ZANU-PF and President Mugabe are prepared to go to rescue the economy.

The signs are that they will not go far enough.

BY: Christie Viljoen – Senior Economist – NKC Independent Economists

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