Causes of the Zimbabwean currency crisis?

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Many Zimbabweans seem puzzled by the currency volatility that we are experiencing in the country at the moment. However, in April 2022, the US National Bureau of Economic Research released a working paper titled Sanctions And Exchange Rates, that outlines the causes of foreign exchange rate increases in countries that are under sanctions.

By Rutendo Matinyarare

According to this document, currencies of sanctioned countries fall due to local currency depreciation caused by a freeze on net foreign assets; reduction in foreign investment; destruction of local investment in manufacturing due to blockage of foreign investment, prohibitions of foreign payment clearances, multi-nationals closing their doors, sanctions senders restricting exports of machinery, technology, tools and inputs to sanctioned nations; reduction in exports and the resultant fall in foreign currency inflows which in turn leads to higher foreign currency demand for imported substitutes which increases precautionary household and industrial foreign currency hoarding that in turn drives demand for foreign currency and reduces the value of the local currency.

The net result of this is the depletion of government foreign currency holdings, balance of payment deficits, government debt repayment defaults and that government being prohibited from borrowing locally and internationally which weakens the local currency.

This then turns into a perpetual and growing cycle of unemployment, erosion of civilian savings and reduction in public service delivery that leads to the masses hating their government.

What Russia Did To Stabilize The Ruble?

Unlike Zimbabwe, Russia has been able to salvage its currency (the ruble) while under sanctions due to a number of historic and geographic advantages absent in the Zimbabwe case. With these advantages that government was able to make several strategic fiscal manoeuvres that have eased the negative impact of sanctions on their currency. In fact, for these reasons, the ruble has become one of the best performing currencies in 2022.

Firstly, Russia has never been colonized. It’s also a big economy of over 145 million people who in the past centuries -particularly after the defeat of Germany in the Second World War- have been able to build self-belief, national pride and patriotism. This has enabled them to amass the world’s second largest gold reserves and third largest foreign currency reserves, hence they didn’t hesitate to invade Ukraine knowing that they would face sanctions.

The nation is also one of the leading suppliers of energy and for that reason the Russians do not spend any foreign currency on importing energy as most other nations do. Instead, they are a net exporter of energy, and since the sanctions, fuel prices have escalated and Russia is demanding rubles for their energy products.

As a manufacturer of its own vehicles, machines, tools, technology, chemicals and medicines (Zimbabwe’s biggest foreign currency cost centers), Russia is able to substitute imports with local products, giving the superpower autarky.

More critically, the moment the war began, Putin tightened Russia’s foreign exchange controls to curb household and industrial precautionary hoarding of foreign currency. This was done to reduce externalization, dependency on imports and to stimulate domestic manufacturing.

Notwithstanding, what has really reduced foreign currency demand is the nationalistic government prohibits the use of foreign currency in domestic transactions and it demands its own currency for its exports.

The benefit of these policies is, no matter how much foreign currency Russian citizens have, for them to transact in Russia, they must sell their foreign currency for rubles to generate demand for the domestic currency while keeping costs of domestic production in a local currency that the government regulates.

When put alongside Russia’s huge energy, gold and foreign currency reserves, their forcing of nations that want to trade with Russia to source Russian rubles in exchange for their own currencies, raises Russia’s already huge forex reserves, reduces the Kremlin’s demand and dependency on foreign currency thereby increasing the value of the ruble.

It follows therefore, that this retains the value of local wages as Russia’s war industry grows and creates new jobs from modernizing and supplying their army which is receiving real life war training in Ukraine.

Zimbabwean Currency Under Sanctions.

Conversely, Zimbabwe is a small economy of about 15 million people (10% of Russia) who adore anything western (particularly the US dollar) and abhor anything home grown because of the suffering caused by sanctions and the effects of colonial indoctrination.

This self-hate opens way for the US government to easily manipulate the economy by increasing USAID dollar injections to NGOs that pay local salaries and grants to civil society organizations, in US dollars and that drives up precautionary hoarding of US dollars by businesses and households.

A US dollar glut then develops in a Zimbabwe with high demand for dollars and this encourages many to make money from foreign currency trading while others hoard and externalize forex as savings, education funds for their children, liquidity to procure luxuries and the purchase of properties outside the country.

It is basically a mass transfer of wealth and savings from majority Zimbabweans [in the form of US dollars] to the few and their secondary homes outside Zimbabwe, in the same way Rhodesian colonial exploitation externalized Zimbabwean wealth.

So, despite the fact that Zimbabwe is generating more foreign currency today than any other time in history, the country is failing to build foreign currency and gold reserves or manage balance of payment, to an extent that government can not borrow from international lenders to support public expenditure, its currency, development or service delivery. And this has put the local currency into free fall.

These are the predictable effects of half a century of sanctions [underdevelopment of 13 years of UN sanctions on Rhodesia passed on to Zimbabwe at independence, inheriting Rhodesian colonial debt, 12 years of sanctions by the apartheid government, 10 years of ESAP and 21 years of western sanctions] on a third world country that was previously bankrupted by a century of colonial exploitation.

Effects Of ZDERA And Executive Orders On Exchange.

Moreover, sanctions on Zimbabwe, have blocked government foreign assets, the government’s right to get reconstruction and development loans from multi-lateral lending institutions after colonialism and the devastating colonial war. They have also denied the government its Lancaster House Agreement right to ask for the cancellation of colonial debt and this has led to the depletion of government foreign reserves due to exorbitant foreign debt repayments, import premiums on fuel, fertilizer, medicines, tools and other basic commodities for government to deliver services.

With the sanctions destroying local industry, government parastatals, industry and financial institutions; households, industry and government have developed a huge appetite for imports which require scarce foreign currency.

Now, because very little foreign currency can be raised by government and industry from international money markets and bond markets, due to sanctions; the above stakeholders chase the large volumes of foreign currency hoarded by households by charging forex for domestic goods and exports concurrently.

But due to potential profits (arbitrage) inherent in the existence of two unequal rates of exchange (official rate and parallel rate) and the never ending appetite for forex in Zimbabwe; many businesses and individuals are tempted to spin their forex revenues on the black market to make an additional profit known as arbitrage.

The foreign currency black market has since then turned into a high returns moneyspinner that is fed by diaspora remittences, government forex allocations bought at the official rate, foreign currency hoarding and the large foreign currency earnings that companies are not banking.

In the end, forex trading has become a business with higher margins than normal business, so many entrepreneurs are channeling investment capital into this illicit business. As a consequence, foreign currency has become a cancerous legal tender that robs the country of its currency value, government of fiscal policy tools and citizens of their local currency savings, as vast wealth is transferred from the state and general populous to moneychangers, with every US dollar that changes hands on the black market.

Over time, the highly demanded foreign currency has become the expensive base for our manufacturing costs, which makes local production expensive and our local products uncompetitive alongside imported substitutes. By now it’s less profitable to manufacture in Zimbabwe than importing, smuggling and or spinning forex revenues on the black market.

The net result of this casino economy, is death of local manufacturing, destruction of jobs and reduction in the tax base, unless duties on imports are raised exponentially.

But with corrupt, unpatriotic customs officials making a killing (like the money changers)from allowing the smuggling of substitute imports, such measures will not save our local industry, jobs or currency and this takes the whole country back to the destructive cycle of 2008.

Furthermore, despite the fact that Zimbabwe has some of the biggest inland gas reserves in Africa, that could make Zimbabwe energy self-sufficient and a net exporter of gas and electricity to earn foreign currency like Russia; sanctions blocking Zimbabwean foreign assets and the purchase of new technology, software, machines and tools, leaves the country continuing to haemorrhage foreign currency on energy, fuel, chemicals and medicines.

Externalization, Brain Drain And Sanctions.

More concerning, according to another study on externalization done once again by the US National Bureau of Economic Research in 2017; since sanctions began, Zimbabweans are estimated to have the fourth largest portion of GDP savings (61%) externalized in off-shore tax havens.

A different study done by an insurance company also illustrated that Zimbabweans in the diaspora earn in excess of $30 billion per annum and they hold in excess of $16 billion as savings in non-tax havens like South Africa, Botswana, Zambia, USA, Australia and the UK.

All this money is stashed offshore because Zimbabweans have no confidence in the Zimbabwean financial system due to conditions created by sanctions and the corruption that emanated from making supernormal profits from blackmarket trading that was born out of sanctions.

The two studies illustrate that sanctions caused a lot of wealth to leave Zimbabwe, but more importantly, Zimbabweans currently hold enough foreign currency reserves to resurrect the economy and stabilize the currency if that money was invested in the economy and banked in our banks.

However, Zimbabweans are unlikely to bring their savings back home until government begins to address the cause of the crisis: sanctions, the negative sentiment that has eroded the confidence of Zimbabweans in their own economy; the endemic corruption of self-centered bankers, business people and bureaucrats who have become addicted to making supernormal profits from arbitrage.

This will require an overhaul of the Zimbabwean psyche, to inculcate selflessness, love of nation and patriotism, so that as a nation we can begin to realize the necessity of self-sacrifice to build our nation so it can preserve the capital we are accumulating.

The same spirit will then drive us to believe in the need for us to produce and build our own Dubai and Sandton in Zimbabwe so that we have a country in which we want to save and spend our money while building a nation we will be proud to defend.

Our government must also become more dedicated to buying gold and minerals to build reserves that back up our currency as the Russians did. From there government must be patriotic enough to demand its own local currency for internal services and exports to increase demand for Zim dollars. Only then will they be able to create policies to build local industry, reduce black market foreign currency trading, importation of luxuries and fruitless imports.

As I have written in previous articles, Zimbabweans are at war and we need a state of emergency to deal with this economic sabotage by sanctions senders, greedy local companies, bankers and citizens, as a nation that is at war.

We must remember that for the US to impose sanctions on Zimbabwe, they declared a national emergency to prohibit their own citizens and investors from investing in Zimbabwe, no matter the profit. Russia also put restrictive laws the moment sanctions were imposed on them by the west and after their currency began to fall.

Russia has thus proved that an economy, especially one as small as Zimbabwe, will not survive an economic war by the worlds most powerful nations when its captains of industry are self-centered and its government behaves as if it’s business as usual.

Sanctions are not a game, they are war, hence the US government found it fitting to have its entire parliament (Congress) make specific laws and its President additionally called for a national emergency, to impose sanctions on Zimbabwe.

Our government should reciprocate by calling for a state of emergency on sanctions, fruitless expenditure, wastage, economic sabotage and corruption, if Zimbabwe is to survive this war.

Our economic problems emanate from an illegal economic war and to fix the problem we must respond to the economic war by smart policy, nullifying our weaknesses and leveraging our strengths.

Finally, the 2017 UNHRC resolution on sanctions, enjoins nations that are under illegal sanctions to seek compensation and reparations from sanctions senders and implementors. This could be a huge source of funds to rebuild our foreign currency and gold reserves in the future, hence ZASM’s legal fight against sanctions is a cornerstone in pursuing reparations that could be critical for rebuilding our country.


The views expressed in this article are those of the writer and do not necessarily represent those of The Zimbabwe Mail.

Rutendo Bereza Matinyarare of ZASM.