What is Zim's zombie money and is it too late to avoid the apocalypse?
Zimbabwe is burning. Behind this week’s flaming rubber, tear gas, blood and arrests lies one simple but devastating fact – there is no money.
The county’s latest troubles hit South African news headlines this week when unrest peaked at the Beitbridge border post over import restrictions on widely-traded goods. Next, in the capital city of Harare riots broke out and taxi drivers clashed with police over corruption and brutality. Then civil servants took to the streets over unpaid wages.
On Wednesday, protests against the government took the form of a stay-away. The streets of the Harare central business district were unnervingly empty. In Bulawayo, police retreated when youths carrying stones threw teargas canisters back at them. Elsewhere, black smoke billowed from tyres burning on empty roads.
It was the introduction of so-called “zombie money” that stoked Zimbabwean citizens finally to reach boiling point, prompting the apocalyptic scenes.
Since the country introduced a multicurrency system in 2009, the strength of the US dollar has made exports highly uncompetitive. Zimbabwe’s foreign exchange is earned largely through exports and, consequently, the country has found itself in a severe cash crunch.
Local banks have put withdrawal limits of $100 per day on each account. Even so, people wait in lines all day for their allocation, only to be told: there is no money, take a number and come back another day.
In short, Zimbabwe is broke, said Gift Mugano, a research associate in the faculty of business and economic science at the Nelson Mandela Metro University and an economic adviser to the Zimbabwean government. “We don’t have money. The whole system is coming to a halt,” he said, speaking from his Harare home.
To ease the cash crisis, the Reserve Bank of Zimbabwe has introduced a new “bond note”, the value of which will be pegged to the US dollar.
This will be printed like other currencies but is backed by a $200-million bond from the African Export and Import Bank. As such, the Reserve Bank has said, the new bond notes will not exceed 4% of total deposits held by banks.
Still, the new currency has bankaccount holders nervous and concerned that this signals a return to the Zimbabwean dollar, which was abandoned in 2009. Specifically, it is reminiscent of “bearers’ cheques”, which were introduced when the Zimbabwean dollar was being phased out.
These bearer’s cheques were cash notes but with an expiry date, and so forced people to either spend that money or bank it. But with a cash-crunch at that time too, customers were not always able to withdraw the money when needed.
In 2008, Zimbabwe’s inflation, at 500-billion percent, made it difficult to carry around even moderate amounts of money in cash.
But since adopting a multicurrency regime, the country has spiralled into deflation of 1.69% because of the acute shortage of money, meaning that prices on average are decreasing. “But prices are not the issue at all. It’s about having the money in your pocket,” said Vince Musewe, an independent economist based in Harare.
There is not enough money to go around, he said. “If you do work for someone today, you won’t get cash today. You will have to wait until there is money available … We can only spend what we earn, largely through exports,” he said, adding that it doesn’t help that the Zimbabwe government is “blowing money left, right and centre as if there is no tomorrow”.
The tax base is also shrinking. “Companies have been closing due to dire economic conditions and employees have been retrenched,” said Cephas Forichi, an economist at NKC African Economics. “All this has reduced the government’s tax base.”
He said the Zimbabwean Revenue Authority failed to meet its tax collection target last year and again in the first quarter of this year.
Zimbabwe’s major sources of liquidity – exports, foreign direct investment, aid and remittances – have all been hit, Mugano said.
Exports have been negatively affected by the strong US dollar and manufacturing has been hurt by deflation. Since 2009, there has been an average trade deficit of $3.5-billion, Mugano said.
Even before the new currency regime and deflation, manufacturing in Zimbabwe was unable to keep up, with antiquated machinery that “belongs in a museum”, Mugano said, adding that the failed land reform programme meant the country had not sustained productivity. “Seventy percent of the raw material that goes into the manufacturing sector comes from agriculture.”
Although the country has been affected by drought, “it has been like this for the past 16 years, so we cannot blame the drought for the error to produce enough”, Mugano said.
Zimbabwe also receives a fraction of the foreign direct investment that neighbouring countries do. “Mozambique is getting $5-billion, we are getting $500-million. And we don’t see job creation. This $500-million are the Chinese purporting to be investors, but are setting up shop and peddling their wares,” he said.
More aid is also out of the question, at least until Zimbabwe repays existing loans. The strong dollar also means remittances are worth a fraction of what they used to be.
One benefit the US dollar did bring was the ability to buy goods from neighbouring countries at a good price. That was until import restrictions were imposed this month, prohibiting the importation of goods ranging from bottled water to Cremora, peanut butter and milk.
Mugano said the import restrictions were the last straw. With a strong US dollar and a depreciating rand, it makes more sense to import from South Africa, which Zimbabweans do. But then the minister of industry and commerce announced the import restrictions.
“When he did that … that’s people’s lives that he is destroying,” he said. “It’s a problematic ban, because they have not given people any alternative.”
Riot police detain residents in Epworth, a Harare suburb, after a protest by taxi drivers turned violent. (Philimon Bulawayo/Reuters)
Musewe agreed. “There is nothing wrong with restricting imports when people are importing products that kill local industry. But the timing is wrong; there is no money to produce anything locally.”
Musewe said the social impact is huge. For example, $2.5-million worth of bottled water was brought into Zimbabwe each month. Restricting these imports will reduce tax revenue too. “Last year 11% of the tax revenue came from VAT charged on imports,” Forichi said.
Businesses on the South African side of the border are gravely concerned. Christopher Makhomu, the manager at Cashbuild in the border town of Musina, said his business had already been badly affected as many “builders’ ware products” have been restricted.
“The Zimbabwean people are not coming. So we have a serious problem – 70% of my business comes from over the border.”
The problem with Zimbabwe’s politics is a given, Mugano said. “To be competitive, Zimbabwe must join the Southern African Customs Union and adopt the rand.” But the problem is political. “You can’t adopt this and expect it to be business as usual. So the question is whether Zanu-PF are prepared to surrender power.”
But, Musewe said, even if Zimbabwe wanted to join, it would be unable to satisfy the conditions, or have the cash in hand that will be needed. And even though the banks have advised Zimbabwe to go this route, he questioned whether President Robert Mugabe could overcome his psychological issues with the rand.
For South Africa, a crisis on its doorstep can only be ignored for so long.
The United Nations estimates conservatively that 1.5-million Zimbabweans live in South Africa. Violence has become commonplace as locals grow resentful as competition for jobs and resources intensify.
“My prayer and hope is for South Africa to sympathise with us,” said Mugano. South African investors can hedge against the depreciation of the rand by investing in Zimbabwe “in sectors where there are no contentious issues of indigenisation”, he said.
Musewe said what was needed was to address the root cause: the legitimacy and competence of Mugabe.
“Zimbabwe needs a political solution, otherwise nothing is ever going to work,” said Musewe, noting that change is coming. “Zimbabweans have never ever gone to the streets before. This is the beginning. I don’t think Zimbabwe will ever be the same.”