x Abu Dhabi, UAEWednesday 13 December 2017

Zimbabwe's embrace of bitcoin poses problems

Price of cryptocurrency in the African country is soaring above global averages

Currently, bitcoin has been reaching up to US$10,000 a unit in Zimbabwe, compared with a global average of about $5,200. Chris Ratcliffe/Bloomberg
Currently, bitcoin has been reaching up to US$10,000 a unit in Zimbabwe, compared with a global average of about $5,200. Chris Ratcliffe/Bloomberg

Bitcoin is the latest indicator to show that Zimbabwe’s attempts to defy economic gravity will, as before, result in unplanned-for ­con­sequences and bruises on the way down.

The southern African country is not alone in embracing the cryptocurrency craze sweeping the world, but with a unique twist – bitcoin is trading up to almost double what it does elsewhere.

Currently, bitcoin has been reaching up to US$10,000 a unit in Zimbabwe, compared with a global average of about $5,200, according to the trading platform Golix.io in the capital, Harare. This situation has persisted for some weeks now and shows no sign of change.

“It’s all about the US dollar,” says a trader based in Zimbabwe. “What we are seeing is not just the usual bitcoin traders and buyers, but regular businesses with bills to pay.”

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Since 2009, Zimbabwe has had no currency of its own but used the US dollar as its fiat money. Whether it is on the streets paying for groceries or importers paying suppliers, all transactions are now settled with greenbacks.

This came about directly after another ill-judged attempt to defy market economics – the mass printing of the Zimbabwean dollar to pay government debts and salaries. In the mid-2000s, the Zimbabwe Reserve Bank quietly turned up the printing presses when it ran out of money to pay civil servants, police and the army.

The result was hyperinflation which, at its height, reached 500 billion per cent, according to the IMF. It was possible for a ­cus­tomer to walk into a store for a loaf of bread and find the price had ­tripled by the time she reached

the till.

If bread was available, that is. The public response to a minute-by-minute inflationary environment was to hoard goods and use them for trade. A litre of petrol would be swapped for a basket of toiletries that would then be exchanged for a couple of chickens. Meanwhile, even the poor walked the streets with wads of cash that were near valueless.

In 2009, the government of ­Robert Mugabe finally gave in, dropped the Zimdollar and accepted the US dollar as fiat currency. Hyperinflation disappeared and prices stabilised. Now inflation is rising again.

“There’s no official statistics but it could be anywhere between 20 and 200 per cent,” says Vince Musewe, an economist in Harare. “It really depends on the goods you are talking about.”

This time the issue is not too much money – it is that there is too little. Because the reserve bank cannot print US dollars itself – the US alone can do that – it must rely on imported cash.

For a while, this was not a problem as remittances from Zimbabweans abroad, exports of coffee, tin, gold and platinum bolstered the inflow.

The government has resorted

to importing cash money to put into the local financial system.

“Yes, we import cash almost every week and we are now importing $10 million on a weekly basis,” reserve bank governor John Mangudya told local publication NewsDay in May this year. “When we say we import cash, we say we import dollars because we said we want to continue using the dollar in this economy.”

Still, this is no longer enough. Noises of nationalising parts of the economy, including mining, have collapsed exports, crimping dollar inflows.

According to Bloomberg, banks are now rationing dollars to as little as $20 a day per client, regardless of the amount reflected in the underlying account. Even then, clients cannot guarantee notes will not run out and people are resorting to sleeping overnight outside banks to ensure they get in at opening time the next day.

The central bank has printed so-called bond notes, which it says carry a value equal to the dollar’s, since the end of 2016.

These are not accepted by foreign suppliers, including those that sell critical goods such as oil and agricultural feed. Ordinary consumers are even more wary of them and stores charge a hefty premium of up to 50 per cent on accepting them.

The result is once again the sharpening of the survival skills that Zimbabweans have honed over two decades of wonky economics. Mr Musewe says consumers are prioritising purchases, which is chasing up the price of essential everyday items such as food, clothing and education. Meanwhile, used cars have almost halved in average price from $4,000 to $2,000.

Consumers, however, remain hostile to the idea of a return to the Zimdollar. The currency summed up all that was wrong with the policy ­approach of Mr Mugabe and his vision of land and industrial reform.

In the early 2000s, he encouraged landless citizens to invade commercial farms mostly owned by whites of UK descent. Agriculture collapsed and the country has yet to recover from the subsequent financial crisis.

In recent years, the remaining large export industry, mining, has played dodge-ball with Mr Mugabe’s government and its desire to transfer majority shareholding to “indigenous” Zimbabweans.

Capital for investment has vanished and companies are making do with what they have, rather than putting money into new plant, machinery and equipment. The result is no actual cash – even a fat bank account equals a thin wallet.

“The problem is the exact opposite of what it was during hyperinflation,” says Mr Musewe.

“Then, there was plenty of cash money, but no goods in the shops. Now, there are goods on the shelves but no money to buy them with.”