Back to 2008 in Zimbabwe as Currency That Wrecked Lives Returns

(Bloomberg) -- For Zimbabwe’s government, the reintroduction of the national currency a decade after its demise is a return to “normalcy.”

For most of the country’s citizens, it’s a bitter reminder of years of hyperinflation, which destroyed their savings and left them bartering for daily basics.

“Remember 2008, when you needed trillions of dollars to buy bread? In Zimbabwe time goes backward,” said Edwin Mapondera, 34, who sells wooden sculptures in the affluent northern suburbs of the capital, Harare. “I’m taking any currency people have and not listening to this nonsense because now the famous Zimbabwe dollar is going to become worthless in no time.”

The Reserve Bank of Zimbabwe said Monday that, starting immediately, currencies such as the U.S. dollar and South African rand would no longer be legal tender. Instead, a quasi-currency known as bond notes, which can’t be traded outside the country, and their electronic equivalent, the RTGS$, will be termed the Zimbabwe dollar.

By reintroducing it, the government is taking the risk that more people will be driven into the black market, further starving the economy of already insufficient state revenue. That could leave the state struggling to pay government workers, who account for about 90% of its budget, and with little money to shore up creaking infrastructure.

Effects still linger from the last time the Zimbabwe dollar crashed and burned, transforming one of Africa’s most developed nations into a place where gasoline and bread are periodically unavailable, almost everyone is unemployed and a quarter of the population has emigrated. Just two blocks from the country’s premier Meikles Hotel, what was once a neat and active bus terminal is overrun by hundreds of vendors selling everything from vegetables to spanners.

The 2008 catastrophe began after then-President Robert Mugabe began backing the seizure of white-owned commercial farms around the turn of the century. The farms’ new owners failed to produce, exports plummeted and the national currency rapidly lost its value. Then the central bank turned on the printing presses in a bid to meet the government’s running costs.

Within eight years inflation reached 500 billion% and the largest bank note was 100 trillion Zimbabwe dollars. Foreign currencies became legal tender in 2009. That initially stabilized the economy, but the strength of the dollar also made Zimbabwean manufacturing companies uncompetitive against lower-cost South African rivals.

In November 2017, Mugabe was ousted and replaced by Emmerson Mnangagwa. The new president pledged that Zimbabwe was “open for business,” but failed to address currency shortages and stagflation. The resulting lack of investment and scarce hard currency left people lining up outside banks. Nor can the government pay for essential imports such as gasoline and wheat.

In February, under the urging of Finance Minister Mthuli Ncube, the central bank did away with the insistence that bond notes and the RTGS$ trade on par with the U.S. currency and instead created an interbank market. Despite this week’s announcement, the RTGS$ has continued its decline. It traded at 13.50 to the dollar Tuesday, according to data compiled by Bloomberg, bringing its fall this quarter to 69%.

“The market was self-U.S. dollarizing,” Ncube, an economist who has lectured at the University of Oxford, said in a video posted on Twitter. “It was uncontrollable and we felt that we needed to bring the situation under control.”

Ordinary Zimbabweans have seen at least three rounds of fuel price hikes this year, and the cost of other goods such as bread and beer have risen markedly. Inflation, officially at almost 100%, is much higher if black-market rates are used.

“This is going to cause widespread panic among a highly sensitive consumer base, which could provoke social unrest,” Jee-A van der Linde, an analyst at NKC African Economics in Paarl, South Africa, said in a note to clients. “The country simply does not have the foreign reserves required to back its own currency. Moreover, there is nothing that stands in the way of the RBZ to create more money.”

That sentiment is echoed by Zimbabwe’s business sector.

The central bank must “exercise restraint and prudence with the printing machine,” said Denford Mutashu, president of the Confederation of Zimbabwean Retailers. The Chamber of Mines of Zimbabwe said its members want to know if they will still be paid for their gold in the foreign currency they need to pay for essential imports.

But the government’s biggest challenge may be avoiding a repeat of the unrest it saw in January when streets protests, led by labor unions, erupted after the fuel price was more than doubled overnight. At least 17 people died in the ensuing crackdown by security forces.

This decision “destroys whatever little confidence what was left,” said Peter Mutasa, president of the Zimbabwe Congress of Trade Unions. “As workers we reserve the right to do whatever is right for us and we will decide the way forward on how best we proceed.”

--With assistance from Ray Ndlovu and Paul Wallace.

To contact the reporters on this story: Antony Sguazzin in Johannesburg at asguazzin@bloomberg.net;Brian Latham in Harare at blatham@bloomberg.net;Godfrey Marawanyika in Harare at gmarawanyika@bloomberg.net

To contact the editors responsible for this story: John McCorry at jmccorry@bloomberg.net, Anne Swardson, Paul Richardson

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