January 24, 2009.

SPECTACULAR COLLAPSE OF ZIMBABWE'S CURRENCY

Once one of the most vibrant economies in Africa, Zimbabwe is in the grip of an unprecedented socio-economic crisis that began in 1997 when the Zimbabwean dollar was affected by the unbudgeted war veterans' allowances. At independence, the Zimbabwe dollar was stronger than the US dollar when one US dollar was worth Z$0.72. All the glory went out in November 1997.

Once one of the most vibrant economies in Africa, Zimbabwe is in the grip of an unprecedented socio-economic crisis that began in 1997 when the Zimbabwean dollar was affected by the unbudgeted war veterans' allowances. At independence, the Zimbabwe dollar was stronger than the US dollar when one US dollar was worth Z$0.72. All the glory went out in November 1997.

The war veterans, then numbering about 50,000, staged violent demonstrations to arm-twist Robert Mugabe (their patron) to award them gratuity payments of Z$50,000 each and a host of other perks - all unbudgeted. Then the genesis of Zimbabwe's economic troubles began when the Zimbabwe dollar resultantly crashed on November 14, driving up inflation and setting off the economy on an unprecedented slide from which it is yet to escape.

Withdrawal of balance-of-payments support by the IMF in 1999 and Mugabe's chaotic farm seizures that began in 2000, helped quicken the demise of the economy. The resultant rapid fall in earnings caused Zimbabwe to become a poor credit risk, resulting in lines of credit being withdrawn.

The current governor of the Reserve Bank of Zimbabwe, Gideon Gono, was installed with a mandate to cure the economic ills - specifically to arrest the hyperinflation and bring it down. His futile efforts have ranged from the introduction of foreign currency auctions, knocking off zeros (in all 13 zeros) from the Zimbabwean currency to the introduction of the interbank foreign exchange market.

While the Zimbabwe dollar traded at 98 million against the US dollar on the interbank foreign exchange market at the beginning of January, on the black market, where most residents buy their foreign exchange, it changed hands at 100 billion to one. The interbank foreign exchange market is now subdued and inactive. It is almost synonymous with the previous arrangement (fixed rate of US$1: Z$30,000).

The country's stratospheric inflation rate, one of the worst in world history, entered a new, yet more incredible realm on January 16 as the Reserve Bank introduced a new family of trillion-dollar bank notes, beginning with one for 10 trillion Zimbabwean dollars, which is worth about US$8 on the black market. The central bank would also gradually release Z$20 trillion, Z$50 trillion and Z$100 trillion notes. The Z$100 trillion note (about US$30) is worth less than the ink used to print it. Hyperinflation has forced the central bank to keep issuing new banknotes which quickly become almost worthless.

Previous banknote issues have done little to ease the plight of Zimbabweans who often line up for hours outside banks to withdraw barely enough to buy a loaf of bread. Though estimates vary, Zimbabwe's inflation rate is estimated at over a trillion percent, a figure that has seen the Zimbabwean dollar lose its value by over 15,000% in the space of a single month. The RBZ last introduced another note, the 10 billion dollar note, ahead of the festive season on December 19, 2008.

Critics blame the economic meltdown on government mismanagement, including the seizure and redistribution of thousands of white-owned farms. The once-thriving commercial farm sector and exporter of agricultural produce has fallen into ruin.

A collapsed currency is the most visible sign of Zimbabwe's deepening economic and humanitarian crisis that is also seen in rising acute shortages of food, fuel, electricity, clean water and basic commodities, amid outbreaks of killer diseases such as cholera and anthrax. Despite government denials that the economy has been "dollarised", local currency is virtually unacceptable as legal tender. Grocery purchases, public hospital bills, property sales, rent, legal fees, vegetables and even mobile phone recharge cards in Zimbabwe are now paid for in foreign currency.

It is obvious that the economy is now "dollarised" as many companies no longer sell by cheques or Real Time Gross Settlement (RTGS) system, and are demanding the scarce foreign currency in cash. However, the Mugabe regime seems too embarrassed to admit that it has officially "dollarised" the economy. This would also discredit the regime for the obvious loss of sovereignty. The situation is difficult to reconcile with Mugabe's oft-repeated declaration of his country's sovereignty and frequent anti-imperialist outbursts.

Since the introduction of money as a medium of payment, it has become an important national symbol, which serves to enhance a unique sense of national identity and sovereignty. It appears "dollarisation" is therefore a greater threat to national sovereignty than any perceived threat of re-colonisation by the British. In Zimbabwe, "dollarisation" reflects the failure of domestic financial and monetary policies since the late 1990s.

For the Mugabe regime to approach the South African Finance Minister, Trevor Manuel, and the South African Reserve Bank Governor, Tito Mboweni, with a proposal that they rescue the Zimbabwean economy by extending the common monetary area of the rand into Zimbabwe, is a clear sign the Zimbabwean currency has collapsed. Tomaz Salamao, Executive Secretary of the Southern African Development Community, has reportedly suggested that Zimbabwe's depleted foreign reserves be topped up with the South African currency and that Zimbabwe be allowed to join the rand monetary area.

What then is this "dollarisation"? Full or official "dollarization" is the adoption by one country of another's currency as legal tender. In the case of Zimbabwe, the US dollar and the South African rand are widely accepted. The adopted currencies have taken over all the functions of domestic currency. Thus, as the Zimbabwean dollar remains the legal tender of the country, this has led to a situation economists term ‘partial dollarisation'.

The Mugabe regime, invoking its sovereignty mantra, initially rejected the suggestion to adopt the SA rand, but is reported to have backed down under the pressure of the imploding economy and proposes issuing Zimbabwean dollars that are fully backed by and convertible into the rand at a fixed rate. Under this plan, the currency board will initially be capitalised by South Africa and the rand will be allowed to circulate legally in Zimbabwe. The ultimate aim would be to stabilise the exchange rate of the Zimbabwe dollar and curb hyperinflation, enabling the country to buy foreign exchange and continue to import essential goods.

In order to attract foreign currency into the official market, Zimbabwe's central bank has, since September 2008, introduced Foreign Currency Licensed Warehouses and Retail Shops (FOLIWARS) made up of 1,000 retailers and 200 wholesalers to sell goods in foreign currency. The authorities have also recently licensed mobile phone service providers to accept foreign exchange for airtime and other services, and permits public hospitals to receive payment in other currencies. Other shops and service providers have followed suit, despite warnings that those who flout the country's foreign exchange regulations will be prosecuted.

Almost everyone in the country is now buying and selling in foreign currency, rendering the Zimbabwe dollar almost worthless on the domestic market. Even bank queues that characterized the daily lives of people last year are disappearing, as more people turn to using either the South African rand or US dollars. For example, a minibus ride from Glen View to Harare City centre costs US$1. A bus ride from Harare to Mutare in the east costs US$35. This has extended to rural areas, where villagers now sell their fresh produce in US dollars.

The "dollarization" has extended to school tuition with private schools setting fees in US dollars, putting education out of reach of most people. Chisipite High School in Harare is charging US$1,200 per term, and was asking pupils to bring fuel coupons worth US$300 with them on their first day of the term as a deposit. Roxer Academy primary in Harare is charging US$800 a term, while in Bulawayo the Masiyephambili Primary School is requiring a fee of US$650.

Despite the government's insistence that the economy has not been "dollarised", many state institutions are now charging for services in foreign currency, mostly United States dollars and the South African rand. The regime has legislated that many custom duties and other import charges be payable to the Zimbabwe Revenue Authority (Zimra) in foreign currency. The Zimbabwe Electricity Supply Authority (Zesa) is seeking foreign currency payments from the mining sector. State universities have joined the foreign currency craze, pegging fees in foreign currency, a move students' activists say could leave thousands of students stranded.

The Midlands State University (MSU) published a notice indicating that all students must now pay their fees in foreign currency. The fees range from US$500 to US$710 for undergraduate programmes, while those studying for the Master of Business Administration (MBA) will pay slightly over US$1,200. Other postgraduate programmes cost up to US$824.

The new schedule was reportedly approved by the Ministry of Higher and Tertiary Education and will also be distributed to students at other state run universities like the University of Zimbabwe and the National University of Science and Technology.

The outgoing health minister, David Parirenyatwa, said the government had allowed public hospitals and clinics to give patients the option to pay in foreign currency if they so wished. He said this did not mean the health institutions were no longer accepting local currency.

"What we have said is that our patients should continue paying in local currency, but in the event that they opt for foreign currency, we are to go by the Reserve Bank of Zimbabwe regulations," Parirenyatwa said. "The idea is meant to facilitate a smooth flow of services while the patient receives treatment from the health care provider."

However, in reality the hospitals are not interested in local currency. Zimbabwe Association of Doctors for Human Rights (ZADHR) chairman, Douglas Gwatidzo, said paying in foreign currency at government hospitals showed that the government no longer had confidence in the local currency.

In recent weeks, economists have indicated that within another month the Zimbabwean dollar may become extinct. Indeed, the days of the Zimbabwean dollar are numbered, as more and more people across the country poised to have their salaries paid in US dollars. Only in mid-January, the ZANU (PF) regime announced that all the health personnel in the country will have their salaries paid in US dollars. Speaking on ZBC TV, outgoing Industry and International Trade Minister, Obert Mpofu, said consultations were underway to consider the possibilities of allowing all business sectors to charge for goods and services in foreign currency.

Meanwhile, churches in the country have joined the long list of organisations demanding foreign currency. A pastor with the Christian Centre church one Sunday stunned his congregation when he demanded that offerings be made in foreign currency. Even the Holly Church of God no longer accepts the worthless Zimdollar!

Although Zimbabwe's economy has virtually been "dollarised" the majority of workers still earn the near worthless Zimbabwe dollars. With the virtual total collapse of the economy, most small businesses can barely generate enough income to pay their staff at the end of each month. The Reserve Bank's policies have created a nightmare for most of these small companies and for the majority of the population who have little or no access to forex.

The regime has launched a blitz against businesses which are charging for goods and services in foreign currency without the requisite licences from the central bank. It costs US$20,000 to buy a foreign-currency licence, which legally allows businesses to trade in forex.

Many organisations are not earning forex and there is no way they can pay workers in a currency they do not generate. Every sector now has to be allowed to transact in hard currency to survive. In turn, organisations - both private and public - will be in a position to pay their workers living wages in forex.

Most labour unions are up in arms with employer representatives demanding to be paid in foreign currency. The Progressive Teachers Union of Zimbabwe (PTUZ), one of two unions representing teachers in the country, is demanding salaries in hard currency. Doctors and nurses say they won't return to work unless they are paid in foreign currency. In fact, Zimbabwe's entire civil service estimated at 150,000-strong has demanded foreign-currency based salaries in line with the near "dollarisation" of the country's economy.

Civil servants are demanding a minimum salary of US$604 for the least paid worker while teachers affiliated to Zimbabwe Teachers Association (ZIMTA) a minimum salary of US$2,200. Zimta, together with the Public Service Association (PSA) form the APEX Council, which has been negotiating with the government.

Mine workers have threatened to down tools should they receive their next salary in local currency, a development that could aggravate the crisis in the country's major foreign currency earner.

Meanwhile, workers at sugar cane plantations in the Lowveld downed tools, demanding payment of their salaries in forex. The workers say they also want their employers to give them regular maize-meal allocations to save their families from starvation. City workers in Zimbabwe's capital began an indefinite strike on January 23, demanding to be paid in hard currency. The strikers include mortuary attendants and trash collectors, further crippling the already collapsed city services because of lack of materials or funds.

At the same time, barter trade became rife. The most common commodity used in barter arrangements was fuel coupons. Schools, especially those that are privately run, demanded fees in fuel coupons. Some manufacturers and suppliers only accepted payment in coupons. As the coupons became increasingly acceptable, some employers began to remunerate their workers in fuel coupons. This temporarily provided some relief to the weary workers because they would sell fuel coupons for US dollars or use them as payment for goods and services. Initially, the coupons were quite valuable.

A litre was being redeemed for as much as US$1.50 implying that a 20 litre coupon would fetch US$30. Few coupons would cover monthly basics because then goods and services were still reasonably priced in US dollars. Coupon prices hastily came off as a result of the global slump in oil prices and the increasing volume of fuel coupons in the market. The benefits of holding fuel coupons, outside fuelling the cars, quickly vanished as their values in hard currency terms plunged.

There is a danger many will soon be left with worthless pieces of paper (fuel coupons).

It is illogical to expect people and companies alike to continue earning income in Zimdollars whilst most of their expenses are in US dollars. The economy is quickly moving towards "dollarisation" and besides, some listed companies such as Econet, Innscor and Delta are now operating US dollar businesses.

The impasse on the Zimbabwe Stock Exchange (ZSE) has spilled into 2009 with stockbrokers now advocating for the local bourse to be "dollarised" as investigations of alleged insider trading continue. The stock broking community advocated for the stock market to be "dollarised" so that it reflects the true economic picture of the country and value of counters. The stock market last resumed normal trade on November 17 after Reserve Bank governor, Gideon Gono, read the riot act to banks that were using fraudulent cheques to artificially inflate share prices.

Zimbabwe has endured 10 continuous years of foreign currency shortages triggered by declining export earnings and the suspension of balance-of-payments support from multilateral lending institutions. Foreign exchange shortages have spawned a thriving parallel market that has starved the official interbank market of funds. Economists pointed out that political commitment would be necessary to win crucial economic aid from the international community. The power-sharing agreement signed on September 11, 2008  and celebrated under a glare of international media publicity on September 15, is seen as the only chance to rescue Zimbabwe whose economy is now in ruins after a 10-year recession that has seen inflation shoot to 231 million percent as of July 2008.

There has not been official data for months to show the extent of inflation, and such data is undoubtedly intentionally suppressed by the regime. Economic analysts believe that inflation has surged upwards in excess of one billion percent year-on-year to December, 2008, and is continuing to rise at a horrendous pace.

The Mugabe regime disqualified itself from receiving direct assistance because of human rights violations. The human rights violations severely affected investor confidence and further damage was done when ZANU (PF) policies began to sharply reduce Zimbabwe's foreign earnings by forcing the closure of most of the farming companies that produced most of the country's exports. These were the earnings that had supported Zimbabwe's access to credit.

The reason for the foreign exchange scarcity is not because the lending and development institutions have backed off; it is because of the intense erosion of foreign-exchange generation in the different sectors of the economy. This point is demonstrated by the decreased foreign-exchange generation in agriculture; the reduction in export operations of the manufacturing sector; the decreased outputs of much of the mining sector; and the substantial fall in tourism.

The country's sharply reduced ability to earn foreign exchange certainly made the possible lenders very reluctant, but they became much more so when a large proportion of the funds Zimbabwe wanted to borrow had to be spent on goods for consumption. Much of commerce and industry, and other economic players, have become increasingly dependent upon alternative market funding of imports, at exchange rates encompassing marked premiums over official rates, and this has further fuelled inflation.

The Reserve Bank of Zimbabwe (RBZ), in September 2007, demanded that all foreign currency deposits of foreign funded NGOs and humanitarian organisations were kept by the central bank on their behalf. The organisations then had to maintain ‘mirror' accounts, which reflected the amount of foreign currency in their local banks, which was then reconciled by the central bank. The RBZ strategy to manage the foreign currency had exacerbated the foreign currency shortage and impacted negatively on an already collapsing economy.

In the run up to the 29 March presidential and parliamentary elections, the ZANU (PF) regime used scarce foreign currency reserves to bribe voters ahead of the poll. There was a blatant sequestering of corporate Foreign Currency Account balances by the Reserve Bank and then the official siphoning of these sums to meet official spending needs. The RBZ was responsible for the purchase of farming equipment and buses which were used by ZANU (PF) to entice and bribe voters. Then there was the recent withdrawal of US$92,000 from the central bank by the First Family for an extravagant holiday in the Far East, at a time when Zimbabweans are dying of cholera due to the collapse of the healthcare system.

Zimbabwe's central bank took foreign currency from the accounts of private corporations to pay some of its debt to the IMF, which has threatened to expel Zimbabwe for failure to pay down its debt. Central Bank governor, Gideon Gono, said Zimbabwe's repayment of US$120 million, less than half its debt to the IMF, was drawn from exporters and others with foreign currency reserves. However, many exporters said they found their Foreign Currency Accounts empty. They said they use that money to import spare parts and components for manufacture. Officials from two foreign-owned banks in Zimbabwe, who insisted on anonymity, confirmed that the central bank drew on the Foreign Currency Accounts. It is imperative the ZANU (PF) regime should source its foreign exchange requirements competitively within the open market instead of looting it from business concerns.

Foreign currency reserves have fallen to dangerously low levels at a time when foreign exchange inflows have also fallen due to sluggish prices for the country's mineral exports. The dwindling foreign currency reserves coupled with strong importer demand, triggered an accelerated downward slide in the local unit, which has not stabilised. Insider sources had it that foreign exchange reserves had reached a level of fortnight's cover. Foreign exchange requirements for the government amount to US$350 million per month or US$4.2 billion per year, according to the governor of the Reserve Bank of Zimbabwe.

Foreign investors have been sitting on the sidelines after running for cover following human rights violations since the emergence of the Movement for Democratic Change in September 1999 and the land-reform mayhem that started after Robert Mugabe was defeated in the constitutional referendum in February 2000. The sad fact is that there are few of the foreign investors sitting on the sidelines, if any, that would fund Zimbabwe today, not just because they have lost trust in the shenanigans of the political players, but because today they are bailing out their own economies to stave off recession.

Lack of foreign exchange has hindered the importation of goods essential for industrial expansion, and has led to the closure of companies. Gideon Gono has brought productive investment almost to a halt. Now almost all business activity involves importing, buying and selling, not manufacturing the goods in the country. All the businesses that have managed to acquire reasonable stock have done so by paying foreign exchange for imports and have no option but to seek payment entirely in hard currency. Before long, those without it will be unable to meet basic needs.

It is long overdue for the Mugabe regime to recognize realities, and to respond constructively to them. One such reality is that Zimbabwean circumstance is such that survival of the economy, as weakened as it is, necessitates legalised "dollarisation" (as well as many other long overdue liberalisation strategies), and that "dollarisation" would be one constructive measure towards containment of hyperinflation.

The ZANU (PF) elite needs to overcome its bigoted resistance to that which is now an economic essential, namely the equitable power-sharing programme as envisaged in the document signed in September 2008. It is time for Robert Mugabe to bite the bullet, in the best interests of the populace the Political Global Agreement is intended to serve.