via Zimbabwe’s economy: Nothing for money | The Economist Feb 14th 2015
AS INFLATION climbed towards 80 billion percent in 2008-09, Zimbabweans abandoned the Zim dollar in favour of the American one. Since then, shopkeepers, with no access to American coins, have had to hand out pens, sweets and chewing gum instead of change. Just over a month ago, however, the central bank began issuing “bond coins”, denominated in American cents, to be used only in Zimbabwe. That has triggered a debate about whether the country needs its own currency again.
The advantages of the switch to the dollar were many. Overnight, financial discipline was imposed on wayward officials. Inflation stopped dead, boosting growth and bringing about a general expectation of macroeconomic stability. Once normal commerce resumed, importers enjoyed reduced transaction costs and foreign investors did not need to worry about exchange-rate volatility. But now the economy is on the skids again, thanks largely to mismanagement, and this time the lack of a local currency is exacerbating its ailments.
Dodgy data make it hard to assess how bad things are. Officials talk of 3% growth this year, revised down from 6%. Eddie Cross, an opposition MP, claims that last year GDP was down “by at least 10% and maybe 14%—the same rate of decline as during the collapse of 2008”. Anecdotal evidence bodes ill. One investor says beer sales are plunging. Shopkeepers in downtown Harare complain bitterly. “Corrupt officials take what we pay in tax,” says a mobile-phone dealer.
Meltdown is held off by remittances of up to $500m a year from Zimbabwe’s diaspora, along with rising government deficits and foreign aid. The American government bans all business dealings with certain Zimbabwean officials and companies, but it pays a quarter of the country’s health-care costs. From their own government, Zimbabweans receive very little. Doctors, teachers and policemen frequently strike over unpaid wages.
Mining had spurred the economy for several years, but no more. The government’s indigenisation policy, under which foreign-owned assets are partially expropriated, has scared off investors. The timing is awful: commodity prices are falling and surface deposits of gems and minerals are almost exhausted. Only sophisticated foreign firms with billions to spend on pits and drills can get at the stuff below.
Meanwhile, Zimbabwe has adopted American monetary policy along with the dollar. The Federal Reserve’s talk of higher rates is the opposite of what its economy needs. One Zimbabwean economist says he envies the Greeks, whose “monetary union with Germany at least comes with a minimum of co-ordination and empathy”.
Could dollarisation be reversed? Both locals and foreigners often ask but chances seem low. Zimbabweans have not forgotten the misery of life with the Zim dollar, when shops were empty and petrol was rationed. They have little reason to believe officials would manage the currency better in future.Without public trust, no government can imbue paper with value.
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