Zimbabwe’s attempt to tackle ‘bad’ currency deepens economic woes

Zimbabwe is in the grip of a new economic crisis as the value of the country’s local currency collapses and shop shelves are stripped bare after a panic-buying spree last week.

Attempts to resolve the country’s complex currency system — in which non-dollar-backed electronic money and local “bond notes” are rapidly losing value — have been undermined by mixed messages from the government. The latest crisis is reviving memories of hyperinflation and undermining the new administration’s message that the country is “open for business”.

Amid a desperate shortage of dollars, even local KFC outlets were forced to shut up shop, unable to access the funds to buy chicken.The problems began this month when Mthuli Ncube, Zimbabwe’s finance minister, said he was dividing bank accounts into two types — ones containing “good” and “bad” dollars. The “good” accounts are those backed by real inflows of dollars, remitted by millions of Zimbabweans in the diaspora.

The “bad” accounts are those holding electronic money, known as RTGS, or real-time gross settlement. Zimbabwe has been a dollarised economy for almost a decade since the government scrapped the local currency after a hyperinflationary meltdown.Zimbabweans have lost faith in two surrogate currencies that circulate alongside dollars. These are the “bond notes”, introduced in 2016 and supposedly backed by real dollars, and the electronic money with which people pay for things in the absence of physical notes.In reality, neither trade at anything like parity. Last week, bond notes were worth as little as 20 cents on the dollar.

Mthuli Ncube, Zimbabwe’s finance minister:’ I don’t want to argue with the market’ © ReutersMr Ncube has won praise for admitting that the root cause is unsustainable government borrowing that has effectively entailed printing billions of electronic dollars without real-world backing. But the finance ministry’s attempt to end the parallel currency system triggered rumours that the administration was preparing to wipe out savings through a savage devaluation.

Last week in London, Mr Ncube appeared to confirm that by admitting: “The market has said these currencies are not at par. I don’t want to argue with the market. The bond notes will, at some point, have to be demonetised.” Two days later, as panic spread, Mr Ncube — by this time in Bali for the IMF’s annual meetings — backtracked. The government, he announced, would honour the parity of RTGS balances with dollars, after obtaining a financial guarantee from Afreximbank, a Cairo-based lender. In a tweet, he said.

“Afreximbank has offered Zimbabwe a facility to guarantee 1:1 Convertibility of RTGS balances into US$.” Afreximbank could not be reached for comment.The brewing sense of crisis has negated efforts by the new administration of President Emmerson Mnangagwa to normalise the economy and repair relations with multilateral institutions. Harare has been in arrears with the IMF since 2001.

The appointment last month of Mr Ncube, a visiting professor at Oxford university and a former chief economist with the African Development Bank, had been intended to reassure international investors that Zimbabwe was serious about reform. But doubts persist about whether he enjoys the full backing of the government.Mr Mnangagwa was installed as president after the military ousted Robert Mugabe in November last year.

Elections this July were marred by allegations of vote rigging and by the shooting of protesters days after polling. Mr Mnangagwa narrowly avoided a run-off after it was declared he had won 50.8 per cent of the vote. At the FT Africa Summit in London last week, Mr Ncube outlined his plans, declaring that the “winds of change” were blowing in Zimbabwe.

Among planned reforms, he said, the government was ready to scrap controversial “indigenisation” laws requiring local ownership of platinum and diamond mines.The new finance minister denied suggestions that Mr Mnangagwa’s administration was a military government in disguise. “I am a civilian; I am leading the reforms,” he said.

But back at home, Zimbabweans were reeling from the dollar shortage and protesting against a new 2 per cent tax Mr Ncube has levied on electronic payments, a measure he said was necessary to close the yawning fiscal deficit. Tendai Biti, an opposition leader, told the BBC that the new finance minister would not be able to fix an economic crisis born of years of reckless mismanagement.

“You can rig an election, but you cannot rig an economy,” he said.President Mnangagwa has presented the latest crisis as an inevitable consequence of reform. “The liberalisation of the economy has its pains, and this is one of the pains that we are going to go through,” he said. Yet so acute are fears of a gathering storm that, despite Mr Ncube’s assurances, some Zimbabweans doubt even their “good” dollar accounts will be safe indefinitely.

John Robertson, a local economist, said the Zimbabwean state had wiped out savings before, a reference to the hyperinflation of 2007 and 2008. “This cost people so much that trust in government pronouncements no longer exists.”

Source: Financial Times

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