The Starving Billionaires

Zimbabwe

A worthless currency

Jul 17th 2008 | JOHANNESBURG
From The Economist print edition

The local dollar is fast shrivelling away

The tragi-comedy continues

WITH prices doubling every few days, Zimbabweans now spend huge amounts of time and energy preventing their meagre cash resources from completely evaporating. Trying to catch up with galloping hyperinflation, now officially running at 2.2m per cent a year and at least four times faster in reality, the central bank has been printing ever bigger denominations. But it is outrun by galloping prices: at last count, the most valuable banknote available was for 50 billion Zimbabwean dollars, now worth barely 70 American cents on the black market, and the stock of Zimbabwean dollars is dwindling. Local cash could become scarcer still, now that the German company that was providing Zimbabwe with paper to print its banknotes has cancelled its contract; the Zimbabwean monetary authorities are likely to turn to a less specialised supplier. Meanwhile, people do not even bother to pick up notes of hundreds of thousands on the pavements of Harare, the capital. At independence in 1980, the Zimbabwe dollar was more valuable than the American greenback.

It may seem odd that the local currency is still used at all. From Z$25 billion to the American dollar at the beginning of this month, the cash exchange rate had jumped threefold within a fortnight. In restaurants or shops, prices are still quoted in local currency but revised several times a day. Salaries are paid in Zimbabwean dollars, still the only legal tender. A minibus driver taking commuters into Harare every day still charges his clients in Zimbabwe dollars—but at a higher price on the evening trip home—and changes his local notes into hard currency three times a day. The local money is losing its relevance.

Zimbabweans spend their local dollars as fast as possible or change them into hard currency on the black market. A parallel system is thriving in back offices and parking lots. Ronald was a civil servant but became a money dealer about a year ago to feed his family. He now makes about $100 a month, whereas his former colleagues earn the equivalent of less than $2 a month, enough to buy two loaves of bread. On a recent trip, this correspondent changed money from a central-bank employee running an illegal foreign-exchange business in his own office.

With a strict daily limit (currently less than $1.40) on bank withdrawals, people shun banks as much as possible and are returning to a cash economy. Petrol and rents are now charged mainly in American dollars or South African rand, but since some landlords have been taken to court, rents are increasingly often paid for in groceries. People buying overpriced cooking oil or sugar on the black market, since those items have long vanished from shops due to official price controls, are charged more if they pay in local dollars. Petrol coupons have become a virtual currency.

John Robertson, a local economist, reckons that the informal economy has probably become larger than the formal one. Though estimates are fuzzy, he believes that money sent by Zimbabweans abroad to friends and relatives at home, which used barely to register on Zimbabwe’s foreign-exchange radar screen, now accounts for probably a third or so of the country’s foreign-exchange inflows.

Turning to foreign exchange or barter is what you would expect in countries that have had inflation of more than a few hundred per cent a year. At the height of its inflation crisis, shops in Argentina were no longer able to price their goods. In some cases, Peruvians started using lavatory paper, then in short supply, as currency. But Zimbabwe holds the dubious distinction of being the only country in the world today that is suffering from hyperinflation: that is, prices are increasing by more than 50% a month. It has not yet reached Hungary’s level after the second world war, when inflation peaked at 42 quadrillion per cent a month. But it could yet get there.

In May, the central bank decided to let the exchange rate, until then fixed at a grossly overvalued rate of Z$30,000 to the American greenback, float on the interbank market. For a short while, the rate settled at a level close to the black market’s. But very few ordinary people can obtain foreign exchange from banks; most still use the black market to get rid of their Zimbabwean dollars. So the legal and parallel rates have again grown apart. People sending money or groceries to relatives in Zimbabwe still use informal channels.

Hyperinflation can usually be tamed within a few months, provided authorities stop spending money they do not have and no longer turn to printing presses to cover for it. But the damage lingers for years. Argentines held about 60% of their bank deposits in foreign exchange three years after the high inflation of the late 1980s was over, compared with less than 10% before the crisis. In Peru and Bolivia, over 80% of bank deposits were held in hard currency three years after the countries’ inflation crises.

Reform will eventually come and prices will stabilise in Zimbabwe, especially if President Robert Mugabe is replaced; but the local dollar will never be the same. Some people have suggested that a reformed Zimbabwe should become part of the rand zone, but so far neither the South Africans nor Zimbabwe’s battered opposition have sounded keen on the idea.