Blockchain Transparency Can End Zimbabwe’s Currency Woes

The Reserve Bank of Zimbabwe (RBZ) is reportedly planning to issue higher denominations banknotes as it attempts to ease the long running cash shortages. According to media reports, the central bank plans to inject $10 and $20 banknotes into circulation in the next few weeks.

This move is expected to bring some relief to Zimbabweans who have had to endure cash shortages for more than half a decade. Those that do access to cash usually have to move around with hoards of bank notes or coins.

This announcement comes on heels of another major decision by the RBZ which severely curtailed mobile money transactions. The RBZ argues that the country’s largest mobile money service, Ecocash is being used as a conduit for illegal foreign exchange activities.

Attempts to End Cash Shortages

To that end, RBZ has shut down some mobile money agents while reportedly imposing a very restrictive transaction cap on those that remain operational. In addition to fueling foreign currency black markets, the Ecocash mobile money service is also used as a platform for buying and selling physical cash.

That practice (of selling cash) has been ongoing since the cash shortages began some 6 years ago.  In late 2019, the RBZ tried to kill this practice by totally shutting down Ecocash mobile money agents but there is was a backlash by the public and the business community. The RBZ eventually relented on this decision.

Meanwhile, this latest move by the RBZ to issue higher denomination banknotes could also be aimed at reducing—or eliminating altogether—the premiums that Ecocash agents levy on clients cashing out.

This plan will probably work for a very short period before premiums start shooting up again. If anything, the new denominations as well as the expected total cash injection of ZWL$600 million (or US$17 million) are hardly enough to compensate for the actual erosion in currency value. Demand for cash will continue to outstrip the supply.

To illustrate, until when Zimbabweans were still using the US dollar as the primary currency, a US$5 bill would be enough to purchase two loaves of bread, half a liter of milk and half a kilogram of beef. When RBZ introduced new local banknotes in late 2016 it was claimed then that these were at par with the US dollar. RBZ introduced $2 and $5 bills in addition to coins that had been in circulation. For a while the local Zwl $5 bill would actually purchase the same items as the US$5 bill.

However, a few weeks after re-introduction of the Zimdollar, an exchange rate emerged which showed that the ‘new’ currency was not at par with the US dollar. The markets deemed the local currency to be inferior then. The exchange rate continued depreciating and by October 2018 it had reached US$1 for Zwl $3.5.

Today the exchange rate stands at one US dollar for every 50 Zimdollars and a loaf of bread now costs ZWL $30 a price which in real terms is lower than what it was in 5 years ago. Now for purposes of this illustration, one realizes that it takes about six of Zwl $5 bills or banknotes to buy a single loaf of bread now when the same bought five loaves 5 years ago. The new ZWL $20 banknote cannot even buy a single loaf!

It is partly for this reason that cash shortages will not end with the release of higher denomination banknotes.

The Balancing Act

In any case, the RBZ has to play a delicate balancing act. On one hand it has to inject a sufficient amount of cash into circulation to stop premiums levied by cash hoarders from spiraling out of control. On the other hand, by injecting cash that actually meets demand, it could be misconstrued to be an admission that the economy has returned to the relentless cash printing era.

It was during this era—between 2004 and 2008—when businesses responded to every release of higher denomination banknotes by hiking prices. This exacerbated the hyperinflation situation which eventually went on to become the second highest ever recorded in 2008. By that time the Zimdollar had virtually collapsed and people were now defiantly using foreign currencies like the US dollar and the South African rand as means for settling transactions.

The RBZ is mindful of all this hence it has adopted this approach to the question of cash shortages. But question remains, is this effective in the long term? That is the question the RBZ cannot answer now because none of its strategies to contain the depreciation of the Zimdollar seem to be working.

The reality is that there is a dearth of confidence in the current RBZ management’s ability to stop a further slide of the currency. Many people believe the RBZ’s currency management system is open to manipulation and cannot be trusted. There are far too many incidences where RBZ personnel have been implicated in shady deals while the institution itself has been involved in activities that go beyond its mandate.

Of course, there are many other factors affecting Zimbabwe’s exchange rate and these are well beyond the RBZ’s purview. However, what maybe within the RBZ’s purview is changing the currency management system from one that requires people to put trust in it to a trustless one.

Using the Blockchain to Restore Confidence

The blockchain technology has been demonstrated to be that infrastructure because it relies on cryptography rather than humans who are fallible. So when the RBZ says it is injecting ZWL$600 million into the economy, citizens will be confident that it will be doing exactly that.

With a decentralized blockchain it will not be possible for elements with a penchant for manipulating RBZ’s currency management system to do so. For example, it is not be possible to issue extra digital coins without the consent or knowledge of the public if such coins are underpinned by decentralized blockchain. Decentralization means there will be no clandestine quasi-fiscal activities that this central bank is accustomed to, everything that the RBZ does will be open.

If the RBZ is clean and transparent as it says then it will not have a problem signing up for such a technology. After all, it is this transparency that instills confidence which by extension stabilizes of a currency.

RBZ will not be in a league of its own if it decides to go this route, many central banks across world are at different stages of studying or trialing digital currencies. However, the RBZ will be out of its depth if it decides to go it alone and create its own blockchain. Just like many other central banks, the RBZ does not have the resources or expertise to pull this off.

The best route would be partner credible technology firm that at least have a track record of building real solutions. For example, the Republic of Marshal Islands, which has embraced this technology, is already trialing a central bank digital currency (CBDC) in partnership with Algorand. Algorand Inc. built the world’s first open source, permissionless, pure proof-of-stake blockchain protocol for the next generation of financial products.

Algorand’s Co-chain Approach

Preliminary reports suggest the small island nation will achieve its immediate objectives like reducing of remittances and taking the lead in financial innovation.

For a country like Zimbabwe, which is experiencing a second bout of hyperinflation in just over a decade, a tailor made blockchain solution can be created using Algorand’s co chains approach. The concept of co-chains stems from the realization that the institutions ideally need both scalable and secure blockchain solutions.

In RBZ’s case, it feels compelled to keep certain of aspects if its currency management off limits but it also realizes it has to be transparent enough to regain confidence of the population. The RBZ has already signaled its willingness to try the blockchain technology and Algorand’s co-chains potentially provide the infrastructure that might suitable for its needs.

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