Zimbabwe’s Bond Note: The Failure of Exchange Controls

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Zimbabwe’s now infamous case of hyperinflation began with incredibly poor decisions on government spending in the 1980s and saw annual inflation rise to hundreds of percent in the mid-to-late nineties. By the late 2000s, inflation rates were totally out of control with businesses closing down, production ceasing and people frantically trying to purchase items which would hold value. Hyperinflation completely wrecked Zimbabwe’s economy and the effects of poor government decisions 30 years ago are still felt today. In 2009, the Zimbabwean government abandoned the Zimbabwean dollar as its value had become so depreciated that people were simply no longer accepting it as payment. It was truly worthless in a real sense.

So what has happened in Zimbabwe since then? During my trip to Zimbabwe in late 2018, I saw first-hand the bizarre multi-currency situation that exists in there. Following the collapse of the Zimbabwean Dollar, the country began to use a multitude of different currencies, the most common of which was the US dollar. The South African Rand and Botswana Pula were also accepted. The government had to import huge numbers of US dollar bills to meet the demand for cash.

Soon enough, a USD cash shortage ensued and partially in an effort to mitigate this shortage the government introduce the Zimbabwean bond note. The bond note was legal tender considered to be near money, but not currency and it was pegged at 1:1 with the US dollar. The government soon discovered that one cannot just “declare” something to be the same value as the US dollar. The public soon realised the discrepancies in the utility of the bond note and the US dollar

When political pundits and politicians use the term “wealth” or “growth” it is important to remember that neither of those terms means “more money.” Money is not wealth, rather wealth is what money can get you. This fact is often ignored by political analysts when discussing stock market booms, increases in the minimum wage and government stimulus. In all of these instances, people think that an increase in the amount of currency in circulation is equivalent to an increase in wealth, but if an increase in the amount of that currency in circulation causes a decrease in value then no new wealth is created. This is very obvious in situations such as Zimbabwe’s hyperinflation when many people became overnight billionaires, however no-one considered Zimbabwean dollar-billionaires “wealthy” because their billions could not buy anything.

A less-severe, yet similar problem was discovered with the introduction of the bond note. As the note was legal tender, but not “currency”, it could not be used to import goods. This is problem is made even worse by the fact that Zimbabwe imported a large number of products from abroad. In the mid-to-late 2000s hyperinflation was so high that supply chains completely broke down. Any business which had a significant time-delay in their supply chain could no longer be profitable. The speed at which the currency became devalued was so great that the latency between ordering materials and selling a final product meant that businesses had no way to make a profit. This is also combined with the large-scale violent seizures of farms in Zimbabwe which crippled agricultural output and caused many to flee to South Africa.

Given this background, it is clear that a 1 bond note – though officially of “equal value” with 1 USD – has less utility than 1 USD. Therefore, Zimbabwean people themselves determined that the value of the bond note is less than the USD, and inevitably the black market exchange rates began to reflect this.

Anecdotally, I remember driving into Harare one afternoon and a policeman stopped us and asked a few questions – where were we going? Where did we come from? Perhaps it was the South African registration plate on our vehicle that caught his eye because the last thing he said before we drove off was “Eh guys, don’t you have some rands for me?” We had seen throughout our trip from Beitbridge to Masvingo and then onto Harare that people were willing but not overly eager to accept the bond note.

Zimbabwe’s experiment with currency control teaches a very important economic lesson: the market always wins. Prices are an indication of the value of something and government enforced pricing will inevitably lead of discrepancies thereof as the item’s value remains the same. This needs to be taken into account any time the government spends billions of a new program or enters the market with a state-owned company. Blindness to market forces will only create shortages or surpluses as the there will be a discrepancy between price and value. When it comes to economic regulations, ask yourself, Why does this regulation have to be enforced?  Why is it that individual will not voluntarily do this? In Zimbabwe, pretending the bond note was the same value as the USD was a quick-fix, but on the streets of Harare where people know the true utility and scarcity items, the exchange rate was significantly different. At the end of the day, the market will always win.

A good economist will always see the effects of a policy beyond what is immediately visible. In order to truly understand how economic policy affects a society, one has to think a few steps beyond the mere intentions of the policy. This sentiment was articulated by the French liberal theorist Frédéric Bastiat in his essay That Which We See and That Which We Do Not See. The consequence of Zimbabwe’s government not considering that is which not seen has lead to the destruction of their currency and their economy. It is a terribly tragedy which should serve as a warning to other nations who think they can legislate fantasy into reality.