The case of Zimbabwe's disappearing US dollars

HARARE — Until last year, Zimbabwe was the only country in Africa that used the US dollar as its primary currency.

Zimbabwe had abandoned its own currency for the greenback in February 2009, after the country was hit with inflation rates of over 80 billion percent. Immediately before the US dollar was formally adopted, $1 could fetch you $35 quadrillion Zimbabwean dollars.

That Zimbabwe resorted to the US dollar – the currency of a country with which they have maintained frosty relations for the better part of the past two decades – shows how untenable Zimbabwe's situation had become, as well as the country's schizophrenic relationship with money.

Take, for instance, an incident one night in November 2015, in a bar on the edges of Harare. It was approaching midnight, that time of the night when the barman typically becomes pointedly less chatty. He wants you to leave, but is bound by the unwritten protocols of the bar never to chase away a customer. I took the hint and asked for my bill, enquiring whether his card machine was working.

No, he said, you have to pay cash.

"Oh, okay, I don't have dollars, but I do have rand." The rand is the currency of South Africa, Zimbabwe's southern neighbour, and one of Africa's biggest economies.

"No," the barman said. "We don't accept rand."

I had no US dollars on me, and it would be impossible to find any money changers anywhere at that late hour. I offered to leave the rand I had in my wallet, which came to about R400. He consulted his manager, who said that to ensure I would come back to pay for my three beers, I must leave the money and my identification. After some protest, the manager eventually relented on the demand for my ID. By his thinking, the cash would be a bond, of sorts, for the three beers that had cost $6 – about R90 at the going rate.

Today, though, US dollars and other hard currencies are disappearing. "Bond notes" – the substitute currency that's accepted nowhere else in the world outside Zimbabwe – are the only thing filling the void, so the barman would likely have been happy to accept the rand. The bond notes were introduced by the Reserve Bank of Zimbabwe (RBZ) last year, to replace the disappearing US dollars. The rand isn't widely used as the primary currency because of the its volatility, as well as the reluctance by Zimbabwean fiscal bureaucrats to put themselves at the mercy of the South African Reserve Bank.

Yet however much Zimbabweans might deride the South African currency, South Africa remains its principal trading partner, from where most of Zimbabwe's products are imported.

When I recently bought a book from a vendor who hawks books and records from a stall on Samora Machel Avenue, one of Harare's busiest thoroughfares, he said: "These are the first US dollars that i have received all week."

Whenever the occasional sale happens these days, all he usually gets are bond notes.

"We are headed back to 2007 and 2008 when the crisis was at its worst," he said.

In the township of Kuwadzana, a ghetto to the south of Harare, he pointed out, it had been impossible to buy paraffin – the main fuel used by the poor and working classes in urban Zimbabwe – for days.

It was a story echoed by a barber who operates from The Avenues, a mixed-purpose residential and office suburb on the northern margins of Harare's central business district. He, too, rarely comes across any US dollars, and he's also observed a downturn in business.

"Thursdays used to be busy and I would get as much as $30," explained. Each cut is $3.

"Look," he said in exasperation, "It's almost 12:00pm and I have shaved only one person."

The sorry fates of the vendor and the barber are reflected in the formal economy as well, especially the manufacturing sector, which has suffered the deleterious effects of President Robert Mugabe's policies since 2000.

The result has been an increase in the importation of goods, so all foreign currency reserves go towards importing fuel, drugs, raw materials and other commodities that the once-vibrant manufacturing industry can no longer produce.

"We import more than we export," explained Tony Hawkins, a respected Zimbabwean economist in a telephone interview, adding that Zimbabwe's import bill is approximately $2 billion.

Underlying the crisis is a delicate game by the RBZ to allocate scarce foreign currency to crucial sectors. With so little hard cash to disburse, however, an inevitable black market for US dollars has emerged.

Exporters are supposed to benefit from being on the RBZ's priority list, but with less foreign currency available to them, companies are unable to import the raw materials they need to manufacture products. This means even less foreign currency coming in – so they turn instead to the black market, where it is sold at a premium.

And there are major knock-on effects across the economy. A bureaucrat from a local industry lobby, the Confederation of Zimbabwe Industries, recently noted how the currency shortage has led companies to introduce shorter work weeks or, in some cases, laying workers off altogether. Those layoffs have pushed thousands of people onto the streets to set up stalls to repair shoes, roast mealies (corn), or sell cigarettes.

Depending on whom you talk to, Zimbabwe's unemployment rate now ranges from over 80 percent or, according to the government statistical agency, to just above 10 percent. In the agency's Orwellian definition, a person who is employed in a factory today, but is fired tomorrow, is still officially classified as being "employed" – even if their only income is from selling cigarettes on a street corner.

Trying to distance itself from any responsibility for the crisis, the minister for trade and industry, Mike Bimha, said last month that "companies just have to be innovative. It's not the issue of the central bank, it is the issue of all of us."

Perhaps taking their cue from the laissez faire attitude of government, much of the business community now source cash from money dealers – at a 10 percent premium. Some shops even offer a discount of as much as 10 percent if you pay with US dollars.

Some businesses are forced to obtain their foreign currency on the black market at a premium because the Reserve Bank hasn't allocated them any. One consequence is a hike in the prices of medicines; in some cases, prices have doubled. There are also shortages. At the beginning of the year, Ranophage, a drug used to treat diabetes, couldn't be found in most pharmacies.

Since the cash shortages started early last year, long queues at banks have become a permanent fixture on Zimbabwe's streets. The new bond notes have done little to ease the shortage, and the public remains famished for cash. The US dollar notes that were ubiquitous in 2015 and the previous years have all but been swallowed up by a yawning maw.

One afternoon in early March, an elderly man was sitting on the busy Samora Machel Avenue, a thoroughfare which runs across Harare's central business district. He was resting against the facade of the National Building Society (NBS), a financial institution which has its offices in the Karigamombe Centre, a gleaming rise edifice which went up in the 1980s.

The elderly man, who didn't want to be identified, had the wan look and slow and deliberate motions of a man who is not in a hurry and is prepared to wait. In his younger days, he had been a painter at Willowvale Mazda Motor Industries, a vehicle assembly plant in Harare.

Now, the pensioner was sitting in the company of scores of other elderly people. Pension payments had just been made. He had arrived at NBS at 4:00 am from Mabvuku, a sprawling township on the eastern outskirts of Harare, to get his pension from the National Social Security Authority. He didn't know when he was going to get served and looked back to the time when things were comparatively normal.

"Before the shortages I would arrive at 6:00am and by 9:00am, I would be home," he said. "Things are so bad that some people sleep here. Some people even bring blankets."

The RBZ, wary of risk of repeating the period – most of the 2000s – when it presided over world-record inflation rates, has cautiously released money into circulation. The first to be introduced into circulation in late 2015 were one-dollar bond coins and two-dollar bond notes. When the market grew familiar with the new money, the Reserve Bank of Zimbabwe last month introduced the $5 bond note. The bond note, which the central banking authority arbitrarily pegged as equivalent to the US dollar, has lost some of its value.

The forex dealers, a fixture on Harare's pavements, where they brave the city's merciless sun day after day, sit on stools at a few selected points across the city holding wads of notes in various denominations. The dealers, who are attuned to each and every fluctuation, have a different rate for the dollar and bond notes. At the time of writing, a $1 bond note on the black market was worth 91 US cents. The bond note has lost 10 percent of its value already.

As US notes evaporate and ever more bond notes are introduced, the value of the local currency will inevitably diminish further, invoking the spectre of 2008, when bags of local currency were worth nothing.

As long as Zimbabwe's economic fundamentals remain skewed – the politicians in government who should fix them are more focused on fighting each other in the battle to succeed the 93-year-old Robert Mugabe – the introduction of bond notes is unlikely to solve the country's perennial woes.