ECONOMY: Zimbabwe Battles Hyper-inflation

By IPS Correspondents Reprint | | Print |

Wilson Johwa

BULAWAYO, Aug 21 2003 (IPS) - There is no solution in sight and economists say it can only get worse.

Zimbabwe has an acute shortage of its own bank notes and inflation is not slowing.

Presently, inflation stands at 400 percent but by year-end it is projected to exceed 800 percent.

It seems the economic situation cannot get any worse. Yet all over the country bank queues have become a permanent fixture – ample evidence of the economic crisis that has made Zimbabwe the world’s fastest declining economy.

Automated teller machines have become obsolete and due to the resultant cash rationing of 5,000 to 10,000 Zimbabwe dollars (about two to four U.S. dollars) at a time, it takes days to withdraw enough to live on.

Many parents are queuing up to amass enough cash for their children’s school fees which have increased substantially. They need the money as last term of the year begins early next month.

The shortage is self-perpetuating as those with cash, both individuals and corporate, see no point in going to the bank since gaining access to it at a later stage would be difficult, if not impossible.

In any case, money in the bank earns a negative interest rate of at least 360 percent so there is little to be gained from banking it.

Across the country, finding cash has become an activity on its own, resulting in a loss of valuable productive hours for the relatively few businesses still operating.

With no benefit from banking the cash, an underground market has emerged. Middlemen have sprouted to share the 20 percent commission that is often the cost of cashing a cheque.

For retailers it has not been all sighs though, as some insist on a customer spending at least a sizeable percentage of the value of a cheque if he is to be rewarded with the change.

Analysts point to Zimbabwe’s sizeable budget deficit, estimated to reach 20 percent of gross domestic product (gdp) in the current financial year, as the main cause of the country’s hyper inflation. "Under these conditions, it is not possible not to have high inflation," says Eddie Cross, the economic adviser of the opposition Movement for Democratic Change (MDC).

The state is borrowing and printing money to make up for the gap between revenue and expenditure.

Consultant economist John Robertson says because the government has wiped out savings by borrowing at below the inflation rate in the last three years, its only option now is printing money.

The second major cause of Zimbabwe’s inflation is the loss of export earnings which has created a foreign currency shortage that is driving the parallel market.

The Zimbabwe dollar is on a free fall, with values plummeting almost daily. Foreign currency, which is not available on the official market, is trading on the thriving parallel market at about 4,000 Zimbabwe dollars to the U.S. dollar and 400 Zimbabwe dollars to the South African Rand.

"At these prices it’s impacting on everything we are importing and everything with an import component," says Cross.

The tobacco selling season, during which time the country traditionally receives 50 percent of its foreign exchange inflows, has made little impact this time round since it opened in April.

This is because at about 80 million kilogrammes, this year’s tobacco crop is only half of last year’s due to drought and the country’s disruptive land-reform programme.

Tobacco growers have adopted a wait-and-see attitude, anticipating a promised devaluation of the Zimbabwe dollar from the official rate of 824 Zimbabwe dollars to the U.S. dollar.

"Government have spoilt their chances of getting the money sooner," says Robertson.

However, Cross says the foreign exchange market escalation can also be traced to the fact that the government is no longer using the foreign currency at its disposal to import essentials such as fuel and power.

The state receives about two million U.S. dollars each day through the Reserve Bank. Cross says since the government is not utilising this money, what they are doing with it has become a mystery.

"We can only assume that they are exporting it, perhaps in preparation for a life in exile should things in Zimbabwe get out of hand for them," he says. "The state has thus become the principal cause of inflation."

Robertson agrees, too, that corruption seems to be driving economic policy. Influential government officials are able to access foreign exchange even at the old official rate of one U.S. dollar to 55 Zimbabwe dollars and sell it for a fortune on the parallel market or through importing luxury goods for resale.

"You know that some people are making millions every day," he says. "They have carefully tilted the playing field in their favour such that all the advantages are theirs and the disadvantages are for everyone else."

To date government attempts at bringing down inflation have largely targeted the symptoms and hardly the causes.

In its latest effort, the government has outlawed the holding – by both individuals and merchants – of cash exceeding 5 million Zimbabwe dollars (about 1,600 U.S. dollars). "It will be a criminal offence for any individual to be in possession of cash exceeding 5 million U.S. dollars at any time," says a notice published by the Reserve Bank of Zimbabwe.

"This cash may be in their physical possession, on any premises or land or simply under their control," the notice says, adding that the regulation will be effective from Aug. 24.

Merchants and state-run companies that generate more than 5 million Zimbabwe dollars in cash are required to bank any surplus. They are also required to keep records which "clearly show their cash receipts on each day".

In another attempt at easing the cash shortage, the government has introduced a special type of traveller’s cheque to be used on the domestic market. However, these cheques have flopped largely due to resistance by retailers.

To bring the cash, kept under mattresses and in private safes back into the system, the government announced last month that it is withdrawing the 500-Zimbabwe-dollar note and will be replacing it with a new one within 60 days.

On the first week of October, a 1,000-Zimbabwe-dollar note will be launched too, making this the highest denomination note in the country.

The Reserve Bank of Zimbabwe says it is looking at other denominations. "It takes a year to launch a new note, but we will manage to launch this one in a shorter time-frame," says Reverse Bank of Zimbabwe official, Stuart Kufeni.

Apparently, the Reserve Bank, which has never been afforded any measure of autonomy by the government, has been the latter’s whipping boy in shouldering most of the blame for the cash crisis.

Unwilling to pinpoint the real source of Zimbabwe’s inflation nightmare, the state media and ruling party functionaries have taken turns in demanding heads to roll at the Central Bank.

Cross says unlike central banks elsewhere which make a profit from printing money the Reserve Bank of Zimbabwe is printing at a loss. "It costs them 800 Zimbabwe dollars to print a 500-Zimbabwe-dollar note."

To deal with the cash shortage, he suggests that the Reserve Bank print bigger denomination notes such as a 10,000-Zimbabwe-dollar note, a 20,000-Zimbabwe-dollar and a 50,000-Zimbabwe-dollar note.

To restore confidence in the banking sector, Robertson says the government has to raise interest rates and attract savings and lessen the cash deficit.

In the meantime, Zimbabweans are bracing for increasing hardships since prospects for recovery are a distant prospect.