ZIMBABWE: Local currency becomes an endangered species

Sunday, September 14, 2008

The Zimbabwe dollar moved one step closer to extinction after the central bank authorised the use of foreign currency as legal tender in the country on 10 September.

This announcement by Reserve Bank Governor Gideon Gono does little more than catch up with realities on the ground; the use of foreign currency has been widespread since the elections earlier this year.

Depending on location, there are usually about three types of foreign money in circulation, as well as two local currencies (original and "revalued"), which compete for the title of the world's most worthless unit.

The US dollar and South African rand are in use across the country, while Botswana's pula is favoured in Bulawayo and the west of the country, the Zambian Kwacha in northern areas and the Mozambican metical in Mutare and the country's eastern regions.

The local unit's demise is a consequence of Zimbabwe's hyperinflation - officially estimated at more than 11 million percent - and the tightening of sanctions by the European Union (EU) in the aftermath of the one-man presidential election in June that was widely condemned as undemocratic.

A German company discontinued its contract to supply paper for use as money after the EU reportedly exerted pressure on it, so the Zimbabwe dollar is not only increasingly worthless, it is becoming increasingly scarce.

Gono told IRIN that about 1,000 retail outlets and 250 wholesalers, known as Foreign Exchange Licensed Warehouses and Shops (FOLIWARS), as well as fuel stations, will be permitted to trade in foreign currency for an 18-month period until March 2010, "as an experiment as we gear ourselves up for the 2010 World Cup [soccer] games ... [to be] ready to cater for all visitors to our country."

Neighbouring South Africa is hosting the 2010 FIFA World Cup.

The central bank estimates that each month about 400,000 Zimbabweans cross to neighbouring countries to buy groceries and other goods, spending an average total of US$950 million. The foreign currency is accrued as remittances from friends and family in the "Zimbabwean diaspora", a euphemism for the more than three million people who have left the country in the past few years.

"Against this background it has become compellingly clear that innovations be invoked to increase internal capacity utilisation, as well as shoring up the availability of basic goods and services," Gono said.

He dismissed the notion that the recognition of foreign currency as legal tender amounted to dollarisation. "It is imperative to note that the current measures are neither a condonation of, nor a direct introduction of, the dollarisation of the economy," he maintained.

"These reforms are essentially a pragmatic response to the realities obtaining in the economy, in the interest of advancing smooth functionality of the economy's commercial wheels, in the interest of increasing the availability of foreign exchange in the formal market, as well as in the interest of promoting the general availability of basic commodities through greater capacity utilisation."

Reality check

However, companies trading in foreign currency will only be allowed to do so after paying the central bank an amount anywhere between US$20,000 and US$250,000; the bank will also be entitled to 15 percent of the earnings generated by those licensed to trade in foreign currency.

Tindo Mbare, a former banker, said Gono's actions were a sign of his detachment from reality. "I don't know what country Gono is living in, but Zimbabweans have been trading in foreign currency for more than a year. There are areas where firewood is sold in forex, while bridal prices are now being charged in foreign money.

"In my opinion, the main reason for this experiment is to try and lay their hands on the remittances from Zimbabweans in the diaspora. Zimbabweans in the diaspora have refused to channel their money through official channels in retaliation for being deprived of the right to vote."

Willie Mhlophe, a serving police officer, described Gono's latest financial policy as "mad". "I think there are people in the ruling class who have unlimited access to foreign currency, and assume that we all can get foreign currency. They need to be told that they are creating something they won't be able to control.

"As civil servants, we are not paid in foreign currency, so where will we get that money? I foresee a situation whereby the only shops with goods will be those trading in foreign currency, and that will create civil unrest, especially between members of the poorly paid security forces in the civil service and the ruling and upper classes."