While there are a number of multicurrency economies globally, none compare to Zimbabwe’s. Over the past six years the Reserve Bank of Zimbabwe (RBZ) has authorised nine currencies as legal tender in the country – and they are all foreign.
Zimbabwe officially adopted a multicurrency system (starting with the US dollar) in 2009 when it ditched its own currency as a response to one of the worst cases of hyperinflation in world history. It has since permitted legal transactions in the South African rand, Botswanan pula, British pound sterling and the euro, with a further announcement last year that the RBZ had legalised the Chinese yuan, Indian rupee, Japanese yen and Australian dollar as official tender as well. The aim was to improve cash supply, where liquidity challenges had halted bank lending.
Yet, despite these currencies being legalised, the vast majority of transactions are done in the US dollar, with the rand being more frequently used in areas closer to the South African border, such as Bulawayo. Here, it would not be uncommon to find more than one currency in a shop’s cash register. A product could be priced in dollars, paid for in rands, with change given in a combination of dollars and rands.
As bizarre as this may seem, most Zimbabweans are use to doing the calculations in their head. After all, this was the same population that experienced a monthly inflation rate of 3,500,000% in 2008, saw food prices double every day, and were transacting in trillion dollar banknotes.
The end of the 100 trillion dollar banknote
In June the RBZ announced that it would finally demonetise the near worthless Zimbabwean dollar, allowing the population until the end of September to exchange the national currency for US dollars. The central bank is offering US$5 for every Z$175 quadrillion (Z$175,000,000,000,000,000).
Interestingly, these old Zim dollar notes are fetching more from novelty collectors on sites such as eBay. One bid for the currency’s highest denomination banknote, Z$100 trillion printed in 2008, was at around $23 at time of writing.
Weak rand vs strong dollar
According to John Robertson, a local economist and managing director at Robertson Economics, it might have been more helpful for Zimbabwe to tie itself to a weak currency – like the rand – instead of the US dollar. The result would have supported the country’s export competitiveness.
In the past 12 months the rand has fallen over 25% against the US dollar.
“But we are using the US dollar which is not only strong, but it is also strengthening right now,” said Robertson. “And that means it’s very easy for us to pay for imports because the currency is so strong. But it is very difficult to export the goods we are producing for a price that we can live with.”
However, he added that the dollarisation of the economy did curb hyperinflation by placing money supply in the control of the US treasury. “So it’s a mixed blessing.”
What does a multicurrency Zimbabwe mean for businesses?
While consumers can open bank accounts in all of the legal currencies, including the four Asia-Pacific currencies recently added to the list, it is mostly a US dollar-based system, with very little cash from the other currencies in circulation. However, foreigners visiting the country are advised to have an up-to-date foreign exchange application that they can easily access when needed.
And Robertson added that those looking to take out loans locally should consider whether to borrow in a weakening rand or strengthening dollar.
“You will be paying a very different rate of interest if you are borrowing rand compared with the interest you’d pay if you were borrowing US dollars,” he noted.
For instance, if the rand carries on weakening against the dollar, those that borrowed in rand could settle debts at quite modest costs, although at a higher interest rate. On the other hand, borrowing in a strengthening US dollar might be harder to repay, but at a lower interest rate.
“So if you are paying 10% for a rand loan and 2% for a US dollar loan, that interest has got to be factored into your calculations – looking at which one will give you the best or the easiest settlement when you have to pay back the loan,” continued Robertson, adding that it is also uncertain when the US dollar will start to weaken again.
“So these are the kind of calculations you have to make… What do I gain by getting a low rate of interest, and what do I gain by having a currency that is weakening?”