Inflationomics

Insights from Zimbabwe

Dear Reader:

We have had the fortunate opportunity to find Mr. Byron Zamasiya (BZ), an economist in Zimbabwe, who is willing to share with us his views, observations, and perhaps his experiences during recent years while Zimbabwe has gradually learned what it is like to live under hyper-inflationary conditions. While we may not always agree with Mr. Zamasiya’s conclusions, there is much that we can learn from him. Please read his comments carefully. Some of our comments and observations will be inserted in red.

Robert Jackson Smith (RJS)

RJS: Could you please tell our readers a little about Zimbabwe’s history; i.e, how Zimbabwe arrived at its current plight?

BZ: Inflation was in two digits until 1997 when the government participated in a war to back Kabila of Zaire (DRC) that lasted two years. After the war, veterans of the liberation (war for Zimbabwe’s independence in 1970s) were awarded hefty pay packages—the government printed more money to cover the expense. After that, the (Mugabe) government seized land and attempted to redistribute it from productive owners to its political supporters (unproductive and unskilled owners). Production fell, food and non-food imports grew, import cover fell to nothing. Agriculture-related businesses, which comprise 70% of the workforce, collapsed.  The rest of the economy followed.  Most businesses were informalized (went underground). Unemployment rose to new levels—80%.

RJS: So that gets us through 2001. What happened after that?

BZ: In 2002, fearing loss of political power, the government seized land from its opponents’ financial supporters (the white minority) through the “fast track land redistribution program” pioneered by ex-guerillas. Subsequently, the Mugabe government controversially won the election. Also, U.S. sanctions targeted the elected ruling party officials with the Zimbabwe Democracy and Economic Recovery Act of 2001. Thereafter, exports ceased, foreign credit dried up, bureaus de changes were closed, and a black market in foreign currencies started.

RJS: How did this affect the inflation rate in Zimbabwe ?

BZ: Inflation was in triple digits by then (100—200%). Almost everybody became speculators.  Foreign currency restrictions were imposed and a new, inexperienced central bank governor was hired and inflation jumped to 600%. [For editorial commentary, click here] An asset price bubble came into existence and businesses diverted activity from their core business into purchasing hard assets (including motor vehicles and real estate) in an effort to preserve monetary values.

RJS: So what happened to businesses with this kind of inflation?

BZ: Capacity utilization in the manufacturing sector fell to rock bottom.  Hoarding of assets (motor vehicles, bricks, and empty bottles) began in earnest. The black market in foreign currencies was prohibited by the new central bank governor, and a whistle-blower fund was established to curb parallel market deals. Several banks were placed under curatorship (guardianship) despite the governor's assurance that they were solid. These banks also received financial support from the Troubled Bank Fund (TBF), which was designed to assist financial institutions with temporary liquidity problems. At this point, banks and asset management companies were re-licensed. Many asset management firms and stock brokerage firms went under and their owners skipped the country. This brought the financial system’s credibility into question. People were unable to get their money out of the banks, there were bank runs, and a deposit flight from indigenous banks to traditional banks (Standard Chartered Bank, Barclays and Stanbic Bank) with the remaining banks operating on a rugged terrain.

RJS: What happened to the banks next?

BZ: In 2004, the remaining banks carried on with core business under the watchful eyes of the new governor. There was heavy monitoring of money market transactions [to see how this is done in the U.S., click here] through the national payment system (electronic funds transfer system); however, much money was withdrawn and went looking for higher returns and safer havens. To this day, banks are struggling—especially the indigenous banks—due to shrinking loan portfolios resulting from punitive borrowing rates. Deposits are concentrated in the traditional banks, and the central bank has been charging punitive interest rates for unsecured overnight loans, at times as high as 1500%. In late 2007, a cash crisis surfaced when the withdrawal limit was increased from Z$20m to Z$50m. The banks didn’t have enough cash on hand to meet the added demand.

RJS: How can anyone borrow money under these conditions?

BZ: Borrowing money is difficult. Commercial banks are charging well over 1300% on any loan. The vetting process is so stringent and tiring; at times the money loses value well before the loan application gets approved (typical of the Infrastructure and Development Bank). Informal borrowings are done in foreign currency, especially between individuals. I lend you Rands today and you convert them to legal tender (Zim dollars) on the parallel market. When paying back, you will pay me Rands or U.S. dollars. Almost everyone has more than one account at different banks because there is a limit to how much money you are allowed to withdraw at one time (approximately U.S. $25.00). Imagine, you need four maximum withdrawals just to buy US$100 in the parallel market?

It is not attractive for businesses to borrow money unless they are involved in illegal foreign currency trading. For businesses, the only comfortable borrowing avenue is the Productive Sector Fund such as BACCOS, a government-established fund offering money at negligible rates. Of course, the list of qualifying companies is limited to a select group deemed to be producing basic goods.

RJS: How do politically unconnected people survive?

BZ: Some people have benefited from remittances from economic refugees who fled the country in search of greener pastures. The black market for currency and commodities is still flourishing. It has managed to support a sizeable number of school dropouts, office workers, and the unemployed. In urban areas, most of the people are surviving from premiums earned in the black market as intermediaries between buyers and sellers. Last year, liquid cash was being sold at a premium of 15 to 40%. The black market for currency is flourishing with greenbacks fetching 4.5 billion Zimbabwe dollars for 100 US$ and $500m Zim dollars for a hundred South African rand.

RJS: I’ve read that Zimbabwe’s inflation rate was more than 6,000% and that on March 9, 2008, Mugabe signed a law requiring foreign- and white-owned businesses in Zimbabwe to hand over 51% control of their operations to blacks—whether they are trained or not.  What effects do you think this will have on the Zimbabwean economy?

BZ: As of 27 March, 2008, the latest inflation figures show that inflation is 100,528%—an incredible figure. Prices of most basic goods have doubled and tripled between January and March 2008. In January 2008, a ten million dollar bill could buy a full chicken, but as of today March 27, it only buys 2 eggs at wholesale price. Incomes have risen in nominal terms, but price increases have swept away the gains in real terms. This leaves the consumers with a money illusion; i.e. big figures that buy virtually nothing.

As for the new law, it is a threat to development. It sounds noble to say that the majority will benefit, but unfortunately, it is the well-oiled and well-connected people who will benefit. (This can be seen from past experience where the ruling elite already took the prime land for themselves.) This last-minute attack on business will certainly sink some businesses, push up unemployment well above 80%, reduce disposable incomes for families, wear away their buying power, and consequently plunge their standards of living into the doldrums. Children will drop out of school and families will pry apart. Foreign investors will obviously shun Zimbabwe as an investment destination because of the unpredictability of government policies. This consequently deprives  Zimbabwe of much-needed foreign currency and capital. Supermarket chains such as Ok, Makro, and Clicks will be haunted by empty shelves. The consumer is the bearer of all the eventualities. As shops dry up, prices on the parallel market will skyrocket, while nominal wages remain stagnant.

RJS: What do you mean by the “parallel market?”

BZ: When we talk about the parallel market, we mean the unofficial market where deals are done informally and under the table. This market is separate from the formal system (called the underground economy in the U.S.) and is illegal in Zimbabwe. The prices and rates used in this market usually carry a premium above the published prices. On the official market, for example, the US dollar fetches ZW$30,000, while it fetches ZW$45 million on the parallel market. The South African rand and the US dollar are the favorite currencies on the parallel market, for obvious reasons.

RJS: So how will people survive in the long run?

BZ: I have to admit that life is not normal in Zimbabwe. What is very interesting is our ability to think and act beyond the present day circumstances. Gone are the days when people used to take pride in formal jobs! (If you want to live a life full of struggles and long suffering in monetary matters, then get a job in the formal sector—especially the government sector.) My colleagues who are first degree holders earn an average of US $25 or ZW500 million dollars per month. This money can buy only 10 litres of cooking oil or 19 litres of petrol. Teachers fall within this same bracket. The average Zimbabwean now lives by moonlighting. Beside the normal day to day jobs that we have, we also have side businesses, which supplement our incomes. How on earth can someone who earns US $25 per month report for work every day when he requires around US $3 dollars to pay for transport and lunch every day? Worse still, that person would have three or more children who are at a boarding school, where fees are around US 200 dollars per term? We have no choice but to find work in the underground economy!

Unless Zimbabwe undergoes some major political changes in the short run (including a reunification with the donor community), I believe more Zimbabweans will flee the country to South Africa in search of any kind of job (even menial jobs). Botswana may have been a possible destination, except that life isn’t very rosy there either, especially without proper traveling documents.

One thing I do not expect is an uprising. Zimbabweans are peace loving and generally maintain a “mind your own business” attitude. This is especially true of the rural populace that has very vivid memories of the liberation war. In any event, the government has everything it needs to thwart any possible uprising.

RJS: Any chance of people using gold or silver as a medium of exchange rather than the U.S. Dollar, South African Rand, or Euro?

BZ: Trade in precious metals such as gold and silver is controlled by the monetary authorities and is confined to authorized dealers who hold claims to mining operations. In Zimbabwe, there's only one buyer, so the price is not the result of an interaction of market forces. Price controls coupled with stringent regulations make it difficult to use these two metals as a pricing mechanism. While gold would be a favorite hedge because of its stability, dealing in it is almost unheard of. If you were ever to attempt to hedge with it, you would find yourself in the maximum security prison unless you have strong political connections.

RJS: Any ideas on how Zimbabwe could have avoided hyper-inflation?

BZ: Yes, first of all, it should have avoided the DRC war. This was very costly. Secondly, the veterans should not have been paid lump-sum payments. The government had to print more money to cover these payments, and that was inflationary. Thirdly, the land grab and declining productivity of farmers contributed to our inflationary spiral through higher food and fuel prices. Fourthly, the exchange rates should have been allowed to float freely and the two-tier interest rate system should be abolished. Furthermore, the government should not have parted company with the donor communities because this allowed our imports to dry up and eliminated foreign currency inflows and balance of payment support. The government should also have desisted from expansionary fiscal policies and government borrowing as this resulted in the money supply outstripping money demand, thus causing inflation. Government borrowing also crowded out private investors and expanded money supply growth. (It would also have been nice if the government had maintained the rule of law and prevented killings and the brutalizing of people on farms and during invasions.) And lastly, we should never have left a metallic standard. Paper money that is not backed with anything is easily inflated and can ultimately become worthless.

I also believe the monetary authorities should be fully divorced from the government. The central bank should be an autonomous entity with sweeping powers to restrain ballooning governmental expenditures. This would have contained the growth of the money supply and consequently tamed inflation. [Editor’s question and answer: What central bank is totally independent of the government(s) in which it operates? Answer: None. How can it be? It has been issued a government-granted monopoly over the banking system. What the government grants, it can take away if the central bank doesn’t cooperate.]

RJS: Any suggestions for other people who may find themselves confronted with a currency that is being inflated?

BZ: People who hoarded goods profited when they sold their goods in roadside markets in most residential areas—especially high density areas. It’s funny how rarely these sellers are apprehended because they are either connected to the police in some way, or because the fines they pay are not very stiff at all.

On the other hand, people could not hoard enough because the goods were not in shops. It was left up to those with connections in shops to make money out of nothing. The middle class people were unfortunate. People with proper travelling papers (it costs about US$220 to obtain a passport) fled to South Africa (3m) and United Kingdom (2m) and neighboring Botswana. A few are scattered in Canada, USA, New Zealand, Namibia, Kenya and Australia. Those who remain either earn a foreign currency or are benefiting from those who travel regularly to South Africa and buy groceries.

People who were very unfortunate were relegated to the lower class. Of the approximately 5m Zimbabweans in the diaspora, 70% of them are qualified professionals, while the remainder is unqualified. These are the people who are oiling the economy through remittances which come via the informal channel. Sending remittances home is done via money transfer agencies, friends, and relatives. These days the money transfer agencies have been given a green light to make payouts in foreign currency. For some lessons learned about Zimbabwe, click here.

RJS: You mentioned the diaspora of approximately 5 million people or about half of Zimbabwe. Who stayed behind?

BZ: Each of us who stayed behind had his/her own reasons. Some are too old, too young, or maybe do not have traveling papers. (It may be possible to stand in long lines waiting to obtain the necessary forms for a passport and then take forever to have it processed.) Some people are just too optimistic. They hope to see some sort of political salvation in the near future. Another group consists of people who want to obtain academic credentials and then leave. Still others are people who simply have nowhere to go, no skills at all, no education and do not know even where Harare (the capital of Zimbabwe) is. This is true of the rural populace and a few urbanites. Some people are refugees and/or asylum seekers who migrated from Malawi, Zambia, or Mozambique and know no other home. The last group of people who have stayed behind is that of people who are well-connected, financially or politically or in some other way made money by exploiting the system. They have nothing to worry about. They get money for projects or their pals and their children are in the diaspora.

RJS: Any advice for politicians and economists?

BZ: Yes. An economy is an integrated system with inter-related subsystems. A shock in one subsystem will affect the functioning of the whole system. Economic policies need to be fully thought-through, implemented and well administered. Do not jump the gun! This has catastrophic implications on the social, economic and political fabric of a nation. No government has succeeded in isolation. We need each other for trade, balance of payment support and credit lines. Once these dry up, an economy is surely headed for a free fall. Lastly, populist policies that improve political mileage are meaningless as they cost the whole nation while enriching a select few! [Populist policies like universal health care, unemployment compensation, job creation, and minimum wages?]

RJS: Any last thoughts for our readers?

BZ: Yes, politicians are like devils. It’s easy to tell when they lie. How? Whenever a politician opens his mouth, he is lying. The only truth that he tells is probably his/her name and the party that he represents. It also sounds as if these seasoned politicians are natural orators. They seem to know how to capture the attention and win the sympathy of followers, especially when the people are fed up. Be careful of their promises!  [Amen]

RJS: Thank you, Mr. Zamasiya, for all of your insights and your time to share them with our readers.


Anyone wishing to contact Mr. Zamasiya directly, with further questions, please e-mail him at .

Click Here to see some of the parallels between Zimbabwe and the United States.

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