Zimbabwean ten cent bond coins sit on a table in Zimbabwe. (Photographer: Waldo Swiegers/Bloomberg)

No Currency, Just a Currency Crisis: Zimbabwe's Woes Deepen

(Bloomberg) -- Not having a currency of its own hasn’t stopped Zimbabwe from sliding into a currency crisis.

A scarcity of foreign exchange has led to long queues for fuel, bread and medicine and sent prices surging. Protests erupted across the southern African country on Monday, leaving possibly five people dead, after the government more than doubled gasoline prices to $3.31 a liter ($12.58 a gallon) over the weekend, the highest in the world, according to data on GlobalPetrolPrices.com.

The roots of the pain lie in Zimbabwe’s decision to scrap its own currency a decade ago and adopt a basket of foreign units, with the U.S. dollar being the most widely used. The central bank then printed quasi-greenbacks to fund rampant government spending.

The result is a convoluted system of exchange rates, with consumers charged different prices depending on whether they pay in real dollars, electronic money or so-called bond notes -- even though the government insists all three have the same value. It undermined that argument by saying that foreigners could still pay the old price for fuel of $1.32 a liter if they used cash dollars.

“There is a system of smoke and mirrors going on,” said Stephen Bailey-Smith, senior economist at Danish money manager Global Evolution Funds AG, which invests across Africa. “It makes it extremely difficult to understand the real situation with the economy.”

No Currency, Just a Currency Crisis: Zimbabwe's Woes Deepen

The crisis is a major headache for President Emmerson Mnangagwa, a 76-year-old former spy chief who promised better times for Zimbabweans when he won elections in July. Those were the first after long-standing ruler Robert Mugabe, under whom the economy began its descent, was ousted by the military in late 2017. Mnangagwa was close to Mugabe and served as his vice president.

Finance Minister Mthuli Ncube said on Jan. 11 he’d introduce a new currency within a year. But he gave few details, beyond that the central bank was building reserves, which currently cover barely two weeks of imports. He’s also trying to restructure billions of dollars of defaulted multilateral debts so that Zimbabwe can obtain new international loans.

As violence unfolded on the streets, Mnangagwa traveled to Russia. He’s also scheduled to visit Kazakhstan, Belarus and Azerbaijan before flying to the World Economic Forum in Davos, Switzerland later this month in an effort to attract investment.

‘Suffocating’

Meanwhile, many Zimbabwean manufacturers are closing down. The chief executive officer of Surface Wilmar, the biggest producer of cooking oil, said in an interview last week he had no choice but to shut the company because it couldn’t find the $6 million it needed each month to pay suppliers.

“Manufacturers are suffocating and unless something happens urgently, we could see the country grind to a halt,” Sifelani Jabangwe, head of the Confederation of Zimbabwe Industries, told reporters on Jan. 10.

The nation’s biggest brewer, Delta Corp Ltd., which is 40 percent owned by Anheuser-Busch InBev SA/NV, struck a deal with the government this month to get more foreign exchange from the central bank for imports. In return, it pulled plans to reject payments in bond notes and electronic dollars, known as Real Time Gross Settlement, or RTGS.

Still, plenty of firms are offering discounts, sometimes of as much as 70 percent, if customers use real greenbacks.

‘Corner Shop’

“Everyone’s running their business like a corner shop these days,” said Eliphas Wabata, who sells car parts in Harare, the capital. “Even big retail chains. Offer to pay in cash and the price drops through the floor.”

Bond notes now trade on the black market at 3.2 per dollar, according to the Harare-based ZimBollar Research Institute. RTGS$ units are worth even less.

The stress has also spread to financial markets, with locals piling into equities to hedge against price increases. While official statistics say inflation is running at 31 percent, Steve H. Hanke, a professor of applied economics and expert on hyperinflation at Johns Hopkins University in Baltimore, reckons it’s much higher: 186 percent.

Zimbabwe’s main stock index has climbed 72 percent since last March, easily the most globally. Foreign investors -- who struggle to get their money out the country due to capital controls -- have written down their holdings to more realistic levels. They measure how out of whack prices are by taking the difference between the Harare and London shares of Old Mutual Ltd., Africa’s largest insurer. The Harare stock is now five times the price of that in London, when converted to dollars, double the gap of six months ago.

No Currency, Just a Currency Crisis: Zimbabwe's Woes Deepen

Hanke of Johns Hopkins says Zimbabwe should stick with the dollar because it won’t be able to protect a new currency, but scrap bonds notes and RTGS$. The government could do that by accepting payments, including taxes, in those two at the same rate as the dollar. That would quickly bring down the discount for cash dollars to around 5 or 10 percent, he said.

But Global Evolution’s Bailey-Smith argues the government should rein in spending and work quickly toward creating a new currency. It could build confidence in the unit by using additional reserves and hiking interest rates -- something it can’t do as long as it keeps the dollar, he said.

“The dollarization for Zimbabwe is a sub-optimal policy decision,” he said. “They should have a currency that allows the flexible use of monetary policy.”

©2019 Bloomberg L.P.