Zimbabwe’s misguided attempt to avert economic collapse by borrowing
HARARE, Zimbabwe – It’s late morning in the Zimbabwean capital, and there are already 63 people waiting in line outside a suburban branch of the Central Africa Building Society (CABS) bank. Kudzai Moyo, a 28-year-old graphic designer, isn’t one of them.
“What’s the point?” he says. “If you’re not there early enough, you can forget it. They don’t even have enough cash for the people waiting already.”
Zimbabwe is in the throes of a crippling cash crisis. The southern African country has been using U.S. currency since April 2009, when hyperinflation that reached 500 billion percent caused the Zimbabwean dollar to collapse.
But the solution to that disaster contained the seeds of the next one: Zimbabwe imports far more than it exports – a problem that has been exacerbated this year by one of the worst droughts in recent memory – meaning that those precious U.S. dollars are all flowing out of the country.
Today, there is simply not enough hard currency for banks to meet customers’ demands. As a result, the economy is slowly grinding to a standstill: People don’t have enough money in their pockets to pay for basic goods while businesses struggle to pay for imports.
To stave off economic collapse, the Zimbabwean government plans to introduce so-called “bond notes” denominated in U.S. dollars this month. The pseudo-currency, supposedly backed by a $200 million loan from the African Export-Import Bank, will be put into circulation through a 5 percent export credit (essentially a $5 bonus in bond notes for every $100 worth of goods exported by Zimbabwean companies).
But in a country still reeling from the last economic crisis and where few people trust the government, economists fear the bond note plan will only make things worse.
“The bond note is as good as a leaf in my garden. What a load of rubbish,” Tendai Biti, the former finance minister credited with overseeing Zimbabwe’s impressive economic recovery between 2009 and 2013, told Foreign Policy. “In failed states, economies die because of a lack of trust. The bond note is going to be introduced in a sea of huge distrust.”
The current crisis is in some ways a mirror image of the last one, which was caused by President Robert Mugabe’s decision to print money to fund his 2008 re-election bid. Back then, there was too much money sloshing through the economy whereas now there’s not enough. But the consequences are similarly painful: Savings evaporated, businesses collapsed, supermarket shelves were empty.
Limits on cash withdrawals have been in place for months, but banks, running out of cash themselves, keep making the limits smaller. At some banks, customers are only allowed to withdraw $20 per day, regardless of how much is in their accounts. And there are no guarantees that even this sum will be available.
Edward, a 40-year-old security guard who asked to be identified only by his first name, is in the CABS queue. He’s number 37 in line and has been there since 4:30 a.m. The day before, he had arrived slightly later, but when his turn finally came – more than four hours later – the ATM had run out of money.
Edward’s salary is deposited electronically into his bank account, but like most Zimbabweans he needs cash to pay for basic living expenses like rent and groceries. “When you work, you expect to receive your salary. But when the cash is not there, you get nothing for it. Now I have to talk to my landlord; maybe he will wait for me,” he said.
At other banks across the country, Zimbabweans are sleeping outside to guarantee their spot in line. A cottage industry of food and drink vendors has arisen to cater to them while the unemployed but enterprising are making a few bucks by holding people’s places when they need a break. Rumor has it that bank tellers are making a small fortune by providing information – for a fee – on which branches will receive cash deliveries and when.
Others are trying to avoid the problem entirely by using electronic transfers and mobile money applications, but such solutions are not available to everyone: Internet penetration stands at just 48.1 percent, whereas the large informal economy – worth an estimated $7.5 billion or more than half of Zimbabwe’s $13.9 billion GDP in 2015 – relies mainly on cash.
Talk of new bond notes has injected additional uncertainty into the mix. Zimbabweans don’t even know what they will look like, let alone how they will function in practice. Few believe that the new pseudo-currency will be restricted to exporters; a recurring fear is that bank balances denominated in U.S. dollars will be replaced overnight with bond notes.
The Reserve Bank of Zimbabwe has offered only convoluted explanations, denying this is an attempt to introduce a new currency but at the same time claiming the notes will be considered legal tender, with businesses legally obliged to accept them.
“Bond notes are not a surrogate Zimbabwe dollar for they are not currency but a financial instrument, issued at par with the U.S. dollar,” the Reserve Bank said in a statement in early November. The notes will initially be available in denominations of $2 and $5.
The man behind the bond notes plan is Reserve Bank Gov. John Mangudya, who has been on a whirlwind campaign to reassure the skeptical populace in recent weeks. It’s a tough sell: Although Mangudya comes from a commercial banking background, he has been dogged by reports that his doctorate in business administration is from a so-called “diploma mill” – an unrecognized university that offers fake degrees for a fee.
The man pushing the bond notes has a “bond degree,” the local joke goes.
Piers Pigou, a Zimbabwe expert for the International Crisis Group, says the plan might have worked if it weren’t for widespread distrust of the government. “In a normal situation, the bond notes may be a reasonable project to put forward. But the problem we have here is that Zimbabweans simply do not trust their government. We see the queues at the banks, and people want their money out, because they don’t want it in the system,” he said.
“After the destruction of the Zimbabwe dollar, anyone who believes that funny money bond notes will hold their value is delusional,” said Todd Moss, a senior fellow at the Center for Global Development. “If the bond notes are truly backed by U.S. dollars, there’s no reason not to just put those dollars into the economy. Obviously, the goal is to reintroduce a local currency that can be manipulated for political purposes.”
Morgan Tsvangirai, the leader of the political opposition, agrees. “It’s not an economic problem. It’s a political issue. And once you resolve the political madness, you will be in a position to restore the necessary confidence,” he told FP in an interview.
That madness, according to Tsvangirai, is the result of the government of nonagenarian Mugabe, who has been in charge of Zimbabwe for 36 years and counting. In that time, Zimbabwe has gone from being the “breadbasket” of southern Africa to a net food importer, with endemic economic mismanagement forcing it to abandon its national currency.
“This government cannot resolve the economic crisis,” Tsvangirai said.
Mugabe’s government has faced mounting popular unrest in recent months, fueled in part by the deteriorating economy. The introduction of bond notes could add fuel to the fire. Promise Mkwananzi, a spokesman for Tajamuka – a popular youth movement responsible for several high-profile anti-government demonstrations this year – said his and other civil society organizations are planning a series of protests against the introduction of the bond notes in the coming weeks and months.
“We believe you can’t have any reforms with Mugabe still there. You need to have the people’s confidence, and without that, bond notes cannot work. We believe Mugabe must leave,” he said.
Edward, still waiting in line at the bank, is worried that when he finally gets his turn at the ATM, it will spit out bond notes instead of greenbacks.
“Ah! That won’t do,” he says. “We won’t like that.”
Allison is the Africa correspondent for the Daily Maverick and a consultant for the Institute for Security Studies.