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Feb 21, 2019 | 23:11 GMT

3 mins read

Zimbabwe: A Currency Change Takes Aim at Economic and Political Instability

(Stratfor)
The Big Picture

Zimbabwe's foreign currency crisis has hampered business operations in the country and reduced locals' purchasing power. Though recent currency changes in Zimbabwe, where President Emmerson Mnangagwa has sought to attract foreign investment and project a pro-business stance since ousting former President Robert Mugabe in November 2017, will provide some relief, they will not resolve long-term challenges to stability.

What Happened

Zimbabwe's central bank governor, John Mangudya, announced on Feb. 20 that his country once again has its own currency. Zimbabwe did not actually introduce a new currency, but rather modified its currency substitute, comprising bond notes, to function like a real currency. The new RTGS dollar takes its name from the official name of the bond note system, the Real Time Gross Settlement. Unlike the old system, RTGS dollars are not pegged to the U.S. dollar and will be allowed to trade freely against the U.S. dollar on an interbank foreign currency exchange market.

Why It Matters

The measure is expected to benefit the Zimbabwean economy by reducing the negative impact of black market foreign currency trading. It will also increase Zimbabweans' access to foreign currency; they can now exchange RTGS dollars for foreign currency electronically and for limited amounts of cash at exchange offices. The change should also eliminate incidents of local traders demanding higher prices when paid in bond notes compared with the price they accepted in U.S. dollars (or of simply refusing to accept bond notes altogether), and so should help reduce inflation. Meanwhile, the ability to trade the RTGS dollar against the U.S. dollar will stabilize the value of the former against the U.S. dollar over time, helping insulate the economy from black market currency trading fluctuations. The new measure is also expected to end demands by civil servants for salary payments in U.S. dollars rather than the old untradable bond notes. Together, these improvements will reduce political instability to some extent.

Despite the relief offered by the new currency measure, the Zimbabwean government will still face several economic and political challenges.

Background

Despite the relief offered by the new currency measure, the Zimbabwean government will still face several economic and political challenges. The change will not increase the inflow of foreign currency, but may actually facilitate its outflow. The government has announced that it is depending on several loans to fund a reserve amount of U.S. dollars that the central bank can trade against RTGS dollars for now, but this does not represent a long-term fix. Meanwhile, continued demands by civil servants for raises and the government's struggle to acquire enough foreign currency to guarantee the import of fuel, foodstuffs and other essential products will continue to fuel political instability.

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