In February 2009, facing 500 billion percent inflation, Zimbabwe abandoned its currency, replacing it with a multi-currency system. The U.S. dollar, South African rand, British pound, and Botswana pula were all made legal tender. On Wednesday, the Reserve Bank of Zimbabwe (RBZ) announced the addition of four more currencies to its legal tender collection: the Australian dollar, Chinese yuan, Japanese yen and Indian rupee.
Charity Dhliwayo, acting Governor of the RBZ, remarked that "Trade and investment ties between Zimbabwe, China, India, Japan and
Australia have grown appreciably...It is against this background of growth in trade and
investment ties that in the 2014 national budget, the minister of
finance and economic development underscored the importance of including
other currencies in the basket of already circulating currencies."
The lip service to international trade and investment ties sounds less than sincere in the context of Zimbabwe's "indigenisation policy." Last year, President Robert Mugabe announced that retail business should be owned and run by indigenous Zimbabweans from the start of 2014. The majority of foreign shop owners in Zimbabwe are Nigerian and Chinese-- so although the Chinese yuan is given a status boost as a new legal tender, Chinese business owners are told to get out. Not exactly a great signal for trade and investment ties.
The inclusion of additional currencies as legal tender may actually be a feeble attempt to address what is becoming a fairly severe liquidity crisis. As investors pull funds out of emerging markets, the crisis is deepening. Maybe the idea is that more kinds of money means more money. Critics say that more kinds of money will only mean more chaos.
What makes the whole situation a lot scarier, in my opinion, is that when Zimbabwe gave up its own currency, the RBZ gave up its role as lender of last resort (LOLR). If I remember one thing from Brad DeLong's economic history class, it is "Lend freely, at penalty rate." The RBZ plans to restore its LOLR function by March, but is struggling to recapitalize the LOLR facility in the amount of $150 to $200 million. (Yep, million with an m. Startling when there are 1,426 billionaires in the world.) Possibly too little, probably too late.