How Zimbabwe’s currency crisis is stalling reform

A security company entrusts one of its guards to collect US$4,000 from a client. The client hands over not just $4,000 — but an extra ten dollars. And yet the guard is charged for allegedly stealing from his employer.

While the case that came before magistrates in May in Bulawayo, Zimbabwe’s second city, sounds topsy-turvy, the explanation is simple. The guard was accused of being given US dollars by the client but handing over to his employer “bond notes”, a surrogate dollar in the southern African nation.

While bond notes are officially worth the same as the real thing, their street value is far less. Fencing the dollars and substituting bond notes allegedly meant a huge profit for the guard, had miscounting the money not raised suspicions.

The guard was acquitted, but the bizarre accusation sheds light on the severity of a cash crisis that some fear jeopardises the country’s economic recovery following the end of Robert Mugabe’s decades-long rule.

Emmerson Mnangagwa, who was installed as president when army commanders overthrew Mr Mugabe last year, has declared Zimbabwe “open for business”. His government has courted investors from London to Beijing and promised to change laws that are hostile to foreign investment.

“Zimbabwe’s opening up for everybody . . . it is certainly more open for business than it has been for decades,” says Adonis Pouroulis, a member of a South African mining family whose investments include Tharisa, a London-listed company that has forged ahead with deals to invest in platinum and chrome mines in Zimbabwe since Mr Mnangagwa took power.

But the influx of foreign cash needed to resolve the currency crisis and spur economic growth hinges on presidential elections this month and whether Mr Mnangagwa’s ruling Zanu-PF reverts to type and rigs the polls. Without that international investment, closed ATMs, empty petrol stations and a convoluted daily hustle to find petty cash will remain a fact of life in Zimbabwe.

Last month the crisis also became a mortal threat to Fastjet, the low-cost southern African airline that expanded rapidly in Zimbabwe. Fastjet has almost $7m of its cash reserves trapped in the country, which led it into an emergency share issue after warning that it might have to halt trading.

“This economy is bullshit,” said Takudzwa, a trader in the sprawling Mbare Musika market in Harare, the capital.

“What’s the actual change taking place? When Mugabe was there, things were tight [with cash]. But now it’s worse,” the 22-year-old says, counting a crinkly wad of the violet and green bond notes.

“In the papers they say that they’re equal — but if I can get 100 [real] dollars, someone will offer me $130 [in bond notes],” another trader in Mbare said. He would be offered about $145 in EcoCash, a form of mobile money, reflecting an even deeper distrust of electronic dollars.

The scarcity is due in part to too few dollars flowing into Zimbabwe. Export industries declined under Mr Mugabe and instability in Zanu-PF in the last years of his presidency scared off foreign investment.

But the government has also run up huge electronic balances to service a budget deficit, including a $1.2bn central bank overdraft as of February this year. This has bloated the financial system, with about $8bn in deposits versus less than $70m cash in banks, leading many to store up physical cash.

“I left $6.5bn in the system, but Zimbabwe got fiscalitis — spend, spend, spend,” said Tendai Biti, an opposition politician. Mr Biti oversaw the old currency’s abolition as finance minister in a forlorn power-sharing arrangement with Zanu-PF between 2009 and 2013. The MDC Alliance, a coalition of several opposition parties including Mr Biti’s that is contesting the July 30 poll, said it would abolish bond notes if it wins.

But more aggressive action may be needed given how the shortage has distorted economic activity. OK Zimbabwe, the country’s biggest retailer, said that the difficulty of finding foreign currency was pushing prices up. Hotels and restaurants still accepting bond notes at the official rate said that they may also have to raise prices to keep up with the real value. Queues outside banks, where account withdrawals are increasingly limited to $20 a day, often start at 1am.

“This is an economy that is operating without a currency,” said Yvonne Mhango, Sub-Saharan Africa economist for Renaissance Capital. “The slowdown we are seeing is due to the liquidity crisis.”

But some help is on its way. CDC, the British development finance group, in May launched a $100m loan facility with Standard Chartered aimed at Zimbabwean businesses struggling with shortages of foreign currency. It is an implicit bet on the currency being normalised in Zimbabwe: borrowers will have to pay dollars back. SexLocals

But Ms Mhango said between $1bn and $2bn might be needed to begin tackling the shortage — money that would only materialise if the July elections are credible and international lenders return to the table for talks.

Others are braced for a devaluation of Zimbabwe’s surrogate dollars. “They need to address the exchange rate. Our banking system is compromised beyond belief,” said one Harare-based investment manager who believes that devaluation is inevitable.

Ms Mhango agreed devaluation is likely. “Whatever your electronic balance is showing, you may take a haircut on that . . . it may take up to 30 per cent,” she said. “It needs to happen. There’s no other way around it.”

Financial Times