Just over six months ago, on December 18 2014, we marked the advent of an important event in the economic history of Zimbabwe. The Reserve Bank of Zimbabwe (RBZ) introduced bond coins into the economy, mainly to alleviate the acute shortage of small division currency in the economy.
By Clive Mphambela
The move was met with mixed feelings and debate from many quarters, but today, it seems the coins have received widespread acceptance. Gersham’s Law has proved again that bad money will drive away good money (as people hold on to good money). The bond coins have proven to be good money, offering many benefits and thus today, I will attempt to unpack some of the hidden social benefits of using small denomination coins in the economy and why therefore Zimbabweans should continue to embrace bond coins.
They seem to have gone a long way in easing challenges of small change in shops and supermarkets, commuter taxis and other businesses in the wider economic sphere, but they also have many other benefits beyond the fact that shopping customers are no longer compelled to receive sweets, or other unwanted commodities as change when they buy goods in shops and supermarkets as they now receive bond coins, which are linked directly to the United States dollar — the dominant currency under the multicurrency system — currently in use in Zimbabwe.
Bond coins are issued on a one to one equivalence to the United States dollar, in denominations of 1 cent, 5 cents, 10 cents, 25 cents and 50 cents and the coins are interchangeable anywhere in Zimbabwe into United States dollars at the nearest bank, shop or supermarket or other business in Zimbabwe. This convertibility of the bond coins into US dollars and vice-versa on a one-to-one basis guaranteed by RBZ through a bond facility with an international bank, that supported the perpetual value of the coins in United States dollars. This is why banks accept them and issue customers United States dollars for the equivalent value of coins. This has been a comfort zone for the public.
What are the benefits of a divisible currency in a low inflation economy?
The economy has enjoyed the benefit of price stabilisation since 2009. Inflation has nosedived and is virtually non-existent in Zimbabwe.
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Every low-inflation economy such as ours, requires that the unit of exchange and unit of account be divisible as much as possible. A good example is in the economy of Japan, which is a very low-inflation economy and the Japanese yen is a very divisible unit of currency. This allows businesses to set optimum prices for goods and services right to the smallest possible margin.
This aspect benefits both consumers and business people as customers get exactly what they want and pay exactly what it is worth, rather than a rounded off figure.
Restoration of economic pricing models, a lesson in economics
The lack of coins in the economy had contributed to the inadvertent overpricing of goods and services and forced consumers to overspend as a result of the lack of change.
For example, a manufacturer making an item that would sell large quantities at 67 cents was being forced to produce less and sell the same item at $1 because the currency was not divisible. If these items were sold true economic price of 67 cents, change would be a challenge and transacting would be difficult. At the $1 price, which is not the true economic price and the experienced demand for this product is much less than it would otherwise be.
So both the consumer and the producer were suffering as the manufacturer was not facing the correct demand for the product. In the same vein, the consumer is being short-changed by paying more than they should because the true value is 67 cents and not one dollar. The lost value in terms of economic welfare is called “dead weight loss” in economics. No one is benefitting. The whole of society is losing out. This is because at the lower price of 67 cents the producer would sell more as more of his goods are demanded, consumers will benefit because more is available at a lower cost. That is what the laws of economics say about this matter.
A more accurate determination of price points to match demand for goods and services is made possible by the availability of small change meaning producers can now fine tune production to efficient cost levels, matched by true demand in the market. That should be good for everybody.
Can we have piggy banks at last and teach children to save?
Oh what a wonderful opportunity for our children, which has been brought about by the coins.
Finally, the concept of a one cent, two cents and three cents, twenty five cents and 50 cents can now be appreciated by children when teachers explain arithmetic concepts in class. The confusion between 20 cents and 2 rands or that between 50 cents and 5 rands is eliminated. A dollar is 100 cents, not 10, 11, 12 or 13 rands depending on who is asking.
Both parents at home and teachers at school can now teach and encourage children to save coins in piggy banks and tins at home, helping them along with arithmetic and good saving behaviours. When the coins have accumulated to a reasonable sum, normally a few dollars, the kids can take the coins to the nearest bank and deposit them into their account and get full value in US dollars. Wonderful isn’t it? The kids learn how to save and accumulate value. The kids also learn and experience how to bank money and “lo and behold”, the same process makes sure that the coins come back into circulation in the formal system and do not get stuck forever at home.
Teachers and schools can establish “coin banks” in in the back of the classrooms where kids can run small “banks” with other kids acting as bank tellers and others acting as “clients”.
This form of role-playing has been proven as an effective way of teaching children financial concepts as well as inculcating positive attitudes such as saving.
Small coins also make wonderful counters for kids, making their addition and subtraction skills sharper as they role play in their varying roles as bank tellers or customers. These school room based “banks” can arrange to take the coins back to the real bank if the school is running a savings club.
l Clive Mphambela is a banker. He writes in his capacity as Advocacy Officer for the Bankers’ Association of Zimbabwe. BAZ expressly invites other stakeholders to give their valuable comments and feedback related to this article to him on [email protected] or on numbers 04-744686, 0772206913
