Zimbabwe Reins in Runaway Currency

Zimbabweans are suffering more chaos and confusion as they try to spend or deposit their savings before their cash becomes worthless in late August.



Central Bank Governor Gideon Gono announced at the beginning of the month that three zeros are to be chopped off the country's banknotes, which have spiraled to unreal levels by horrendous inflation that reached 1200 per cent in May this year.



Individuals can deposit only 100 million Zimbabwe dollars (200 US dollars) a day in bank accounts, in exchange for newly denominated notes, in an effort to flush out money launderers and other alleged criminals.



Anyone carrying in excess of that amount is having the money confiscated unless they can show good reason for having it - for example, a legitimate transfer of company wages. Companies are limited to changing 5 billion Zimbabwe dollars (10,000 US dollars) per day.



Police and much-feared youth militiamen are manning the borders and roadblocks across the country to confiscate excess cash. The searches are draconian, with regular reports of women being stripped by militia members. Many trillions of Zimbabwe dollars in old notes are being confiscated.



With the country's banking system subject to red tape, corruption and frequent closures as a result of bankruptcy, it is estimated that 90 per cent of Zimbabweans choose to keep their banknotes at home.



Most people, especially the rural poor, simply do not have bank accounts. The relatively well off with lots of old dollars feel compelled to spend them before the new ones, minus the three zeros, become the legal currency. The spending spree is fuelling inflation, which the Central Bank's reform was, in part, supposed to curb. One Harare man splashed 100 billion old Zimbabwe dollars in cash on ten luxury cars. Petrol prices in Bulawayo, the country's second city, increased one hundred per cent in real terms in just a week following Gono's announcement of his reform.



People scrambling to dispose of old notes are buying houses, cars and fridges - anything that has concrete value. Small-scale farmers are being inundated with astronomical bids for their cattle as hot money seeks conversion into real assets.



Rates on the black market, which long ago supplanted official financial channels as the public's chosen way of dealing, are now impossible to determine because they move by the hour. The only thing certain is they are not going down.



"The reason given for the removal of the three zeros includes the much sung, but abused, word 'convenience'," wrote Webster Zambara, a columnist for the weekly Zimbabwe Standard. "We are told that we no longer need to carry wheelbarrow loads of cash to buy an item that fits in a pocket."



In fact, the currency was so inflated that people carried “bricks” of money in boxes, satchels, suitcases and all manner of containers in order to carry out transactions: a loaf of bread can cost more than one million Zimbabwean dollars.



The re-denomination on August 21 is seen as purely a cosmetic cleanup of a runaway currency, which gave birth to so many noughts that computers and calculators could no longer cope.



Trevor Ncube, publisher of the Zimbabwe Independent and the Standard, said, "It [the lopping off of the three zeros] is semantics. It is like rearranging the chairs on the Titanic." Ncube said Gono had not addressed fundamental issues and that inflation would again take off in a big way.



"What Gono has done is going to buy him a bit of time because one reason he's done this is that banks are coming to him saying, 'We cannot cope with the zeros anymore,'" said Ncube. "'The accounting packages we bought from South Africa, from the UK, can't accommodate the zeros anymore. We need to get rid of the zeros.'



Leading Harare economist John Robertson said, "The re-denomination is a non-event. It doesn't address the underlying causes of the economic problems here. In other parts of the world where re-denominations have worked, they have been preceded by major policy overhauls."



A decade ago, the biggest real money denomination used to be the 1000 Zimbabwe dollar note, with which you felt extremely rich. But ravaging inflation took off from 1997, and Zimbabwe became the country with the world's fastest declining economy, rendering the note useless.



Cries to devalue the Zimbabwe dollar since 2003 have met great resistance because, according to the thinking of political leaders, it would be a signal to the world that the economy really has failed. But transactions using the runaway currency became almost impossible as prices rose in tandem with inflation. President Robert Mugabe's land reform programme, because of its chaotic nature, destroyed the major pillars of the economy.



Commercial agriculture collapsed as experienced farmers were quickly replaced by people, mainly members of the ruling ZANU PF party, who had no experience of farming. The production of money-spinning crops such as tobacco and flowers declined immediately and for the first time Zimbabwe became a net importer of maize, the staple food of ordinary people. All the other formal sectors of the economy, including financial services, manufacturing and mining, began to collapse as well.



With the disintegration of the formal economy, the informal parallel market strengthened, fuelled by the government's obstinacy in keeping the official exchange rate at an artificially high level. As inflation climbed, the government of an increasingly impoverished country pronounced its budgets in trillion dollar terms. Computer accounting programmes had not been designed with so many zeros in mind. Companies were increasingly unable to release financial statements because computer printouts went haywire. The sheer number of digits began to defeat the understanding of executives and board members.



Something had to be done. Hence Gono's surprise announcement of the lopping off of three zeros, giving citizens three weeks to exchange old currency for new.



Eric Bloch, economic adviser to Gono, cited neighbouring Mozambique as an example of how re-denomination can work. "Mozambique has demonstrated a capacity to apply a practical, viable solution to a critical, economically debilitating problem," he said.



Mozambique eliminated three zeros from its currency on July 1.



Mfandaidza Hove, an economics spokesman for the opposition Movement for Democratic Change, chastised Bloch for his specious "mischief". He pointed out that the Mozambican economy at the time of the lopping of its zeros was ticking along healthily, unlike that of Zimbabwe whose gross domestic product has contracted every single year since 1998.



Since 2000, said Hove, Mozambique's economy had maintained an average annual growth of seven per cent and was expected to continue this expansion by between seven and ten per cent for the next five years. Mozambique's growth, he went on, had been "achieved through prudent macro-economic policies against a backdrop of a stable political environment".



The Mozambican inflation rate had continued to fall and the currency to gain against major currencies.



"It is against this background of a growing and well-managed economy with low inflation that Mozambique took the decision to remove the zeros from its currency. In contrast, the Zimbabwean economy has shrunk by 44 per cent since 1998 and is expected to decline by as much as 6 per cent this year," concluded Hove.



Many analysts, in addition to Ncube, say Zimbabwe's zeros will soon be back with a vengeance. They argue that, in the context of a dying economy like Zimbabwe's, chopping off zeros is actually inflationary.



Phoebe Goremusandu, a senior markets analyst in Harare with Old Mutual Asset Managers, said, "A [re-denominated] currency can create an illusion of lower prices, hence a tendency to increase prices even higher. This would see inflation increasing to levels beyond current expectations." She added that it was important there be initiatives to address inflation at a much more fundamental level.



"The truth is that month-on-month inflation has continued to rise at an alarming rate," said another analyst, predicting that this would be the trend for the foreseeable future.



The relief the new family of banknotes will bring relates only to the portability of the money. People are taking old-fashioned purses and wallets out of storage to put them to work again. But the message is that this will be only a passing luxury. The cardboard boxes, sacks and suitcases should not be thrown away.



Benedict Unendoro is the pseudonym of an IWPR journalist in Zimbabwe.