Today, the Reserve Bank of Zimbabwe officially mints a new set of coins and puts them into circulation. Here they are:

Thanks this website
Thanks this website

In my view – this isn’t the worst idea in the world. Of course, the introduction could be a bit problematic.

But what really doesn’t help is this kind of fear-mongering going viral on Facebook: “The bankrupt Zimbabwean government of President Robert Mugabe has hatched a secret plan to raid the U.S. dollar accounts of citizens and give the owners worthless coins.”

Especially when the author writes this:

What the governor did not tell the public, government insiders told Zimbabwe Today, is that on the same day, Mangudya will also announce that account holders will no longer be permitted to withdraw more than $200 at a time.


“If you have any foreign currency in the bank, now is the time to take it all out, before the withdrawal limits are imposed. A lot of people are going to lose money in the banks when the accounts are frozen. This has happened before, when Gono slashed the zeroes and when Zimdollars were rendered worthless upon adoption of the multi-currency regime,” said a senior government source.

There is no faster way to get a withdrawal limit implemented than by starting a bank run. And Zimbabwe’s financial system is fragile enough as it is – so even a whisper of heightened bank withdrawals could spark a full-blown financial crisis.

Some observations:

  1. It’s actually quite difficult to replace an entire currency base with 1 cent, 5 cent, 10 cent and 25 cent coins*.
    *There is also a 50 cent coin, but it’s only coming in March.
  2. I mean, do you know how many coins that is?
  3. According to this RBZ presentation, the initial tranche of $10 million coins would constitute 2% of the money in circulation. If you wanted to replace the full $500 million in circulation, then you’d need 2 billion coins.
  4. And if you say that each 25 cent coin will weigh about 5 grams, then you’re talking about 100,000 metric tonnes of coinage. Which is about 33,000 truckloads of coin to be transported (in armoured trucks that can carry ±3 tons of coinage).
  5. Even if you had a fleet of 500 armoured trucks, they would each have to do 66 trips.
  6. And if you assume that a return trip is 4 days, then you’re looking at a good 8 months before all the coin could actually arrive in Zimbabwe.
  7. Which is plenty enough time for the population to realise that something is up, and to decide that stuff is not as it should be.

To say nothing of: people could just refuse to use the coins (after all, we already did it with the original Zim dollar).

Gresham’s Law traditionally reads: “bad money drives out good”. Which, I guess, is the fear here: that the use of the coins would drive the US dollar out of circulation.

As I see it, the practical reality is that you need to have enough bad money in circulation in order to drive out the good money. At this point, there just isn’t enough “bad” money. Also, as Zimbabwe’s dollarisation demonstrated – bad money only drives out the good until people stop using it. And we’re well practised at dropping the use of a currency we distrust.

The other side of the coin (apologies – I can’t resist the pun):

Why Zimbabwe Really Needs Small Change

The term being thrown around here is “consumer convenience”.

The Reserve Bank of Zimbabwe (RBZ) governor, Dr John Mangudya:

“The coins will ease the problem of small change and eliminate the problem of rounding up of prices to a dollar where there is no option to buy more goods and ease the hassle commuters go through trying to break up a dollar to find change.”

Former Finance Minister Patrick Chinamasa:

“Seriously, what is all this noise about these coins? They are simply meant for the convenience of consumers so that they do not eat sweets when they do not want to.”

But also, consider this article: “Eliminating the penny from the US Coinage System: An Economic Analysis.” The summary of its findings:

  1. Eliminating the penny would result in a rounding tax of $600 million per year, disproportionately affecting the poor and other disadvantaged groups.
  2. Eliminating the penny would also increase government spending by about $2 billion (in 2010).
  3. “Rounding could also have significant negative effects on firms, given the narrow profit margins in convenience stores and supermarkets, the possible adverse effects on theft deterrence, the cost of training cashiers and associated productivity losses, and the high costs associated with non-cash mediated transactions.”

And that’s just the prospect of losing the penny.

Zimbabwe has effectively dispensed with all coinage.

And it has felt many of those effects:

  1. Rounding taxes that effectively punish the poor for being poor (“Let them eat sweets”?)
  2. The “high costs associated with non-cash mediated transactions” (all those vouchers and credit notes and unwanted sweeties).

In particular, the problem is that first one. Here’s a scenario:

  1. I am a poor person that earns $1 a day from selling tomatoes on the side of the street.
  2. Each day, I buy a loaf of bread for $0.80.
  3. But because there is no change, I end up buying a loaf of bread for $0.80, and two small sweets for $0.10 each.
  4. Every 5 days, my spend could have been 5 loaves of bread for $4.
  5. Instead, I have to spend $4 on 5 loaves of bread, and an extra $1 on the sweets.
  6. Cumulate that over time, and I’ve lost 20% of my earnings.

People will obviously try to find ways around that – buying in groups, taking credit vouchers, etc. But in the informal sector, it’s almost inevitable that you end up taking something in lieu of the change.

Hence, the introduction of these bond coins.

How The Bond Coins Are Meant To Work

The idea is this:

  1. The Reserve Bank of Zimbabwe has obtained a $50 million bond facility from the African Export-Import Bank (Afrixembank) to back the newly-minted bond coins.
  2. The bond coins will be freely convertible into US dollars at any Zimbabwean bank.
  3. Meaning that the coins are effectively on a dollar standard.

What Could Go Wrong

The main concern is that these coins will somehow end up supplanting the US dollar as the official currency. If that is the plan, then it has to be a fairly long-term one, because there is no trust in either the current government or the reserve bank to establish a new currency any time soon.

So perhaps this is an attempt to slowly encourage more confidence in the Reserve Bank which might one day lead to a re-introduction of the Zimbabwean Dollar (although this is vehemently denied in public).

But in itself, that is no bad thing. It’s pretty much given that the Zimbabwean economy will eventually need its own currency again. As it stands, Zimbabwe is the US dollar version of Greece in the Eurozone: rendered almost completely uncompetitive by an over-strong currency. It needs to have a currency that is reflective of its trade position. Without it, Zimbabwe is crippled. Albeit less crippled than it was under a hyperinflating currency that was just as unreflective of its trade position.

The other concern is that this will lead to speculative currency trading: where coin payments will be charged at a premium, and coin exchanges will take place at a discount, and you end up with a strange parallel exchange rate fluctuating between the rural areas (where there are no banks to do coin-dollar exchanges) and urban areas (where there are banks).

In the long term, the concern is that this kind of speculative trading encourages a greater supply of the coinage, and Zimbabwe ends up with a smaller version of Nixon abandoning the gold standard when the Reserve Bank imposes exchange restrictions by announcing that the coins will no longer be “freely” convertible for dollars.

But again I’ll say it: in order for any of these bad scenarios to happen, you need widespread acceptance of the coinage.

And we’ll have to see if that actually happens.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at