Economy ‘heads for death spiral’ as Zimbabwe runs out of money

Zimbabwe’s crippling cash shortage has created a financial black hole that is crushing the rest of the economy.

“We deposit the cash and it becomes theoretical, ephemeral,” Mohamed Salam, who owns several small stores selling building supplies in Harare, said in an interview. “My bank balance says it’s there, but it isn’t. I can make payments electronically to local suppliers but I can’t pay foreign suppliers.”

The liquidity squeeze has left companies unable to remunerate their workers in cash or pay foreign suppliers, driving many out of business and adding to the ranks of more than 3-million people who have become economic exiles.

The economy probably shrank 0.3% in 2016 and is set to contract 2.5% in 2017, according to the IMF.

Zimbabwe abandoned its own currency eight years ago and adopted mainly the dollar, initially halting hyperinflation. Now, amid a floundering economy and with a strong dollar stoking the cost of imports and curtailing exports, banknotes have virtually disappeared, prompting the central bank to order private lenders to cap customer cash withdrawals at $150 a week.

While the Reserve Bank estimates that $4bn is circulating in the economy, Confederation of Zimbabwe Industries president Busisa Moyo said it might be as little as $100m — about a quarter of what he believes is needed.

“The economy is in what could turn into a death spiral,” said Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore. Hanke, who studied the advent of hyperinflation in Zimbabwe, blamed the government of President Robert Mugabe for being “so incompetent and corrupt and prone to making bad economic policies”.

A dearth of foreign exchange forced the nation’s two biggest businesses — Delta, a brewer almost 23% owned by Anheuser-Busch InBev, and telecommunications company Econet Wireless Zimbabwe — to suspend dividends and halt payments to foreign suppliers late in 2016. Both companies said they did not foresee any operational disruptions. Econet shareholders agreed to a company plan to raise $130m in foreign currency.

A number of retailers and other businesses are offering big discounts to cash-paying customers. Businesses are limiting the amounts customers can charge on credit cards or refuse to accept them altogether.

“The country has run out of money and we have completely lost the ability to pay for imports,” said John Robertson, an independent economist in Harare.

“This comes against a backdrop of falling productivity as companies fail to access vital inputs because there’s no foreign currency to pay for them. As long as the government continues to do things that discourage both local and foreign investment into the productive sector, the situation can only get worse.”

The economy has halved in size since 2000 as land seizures have crippled agricultural output and exports. The government also deterred investment by enacting laws aimed at forcing some companies operating in the country to have majority black ownership and then issuing conflicting messages on how the laws would be implemented.

Officials at CBZ Holdings and the Zimbabwean units of London-based Barclays and Standard Chartered, the nation’s three largest lenders, said no one was available to respond to questions on the cash crisis.

In a bid to ease the banknote shortage and to discourage cash hoarding, the government began distributing bond notes in November, with about $88m of the dollar-linked securities issued so far out of a planned $200m backed by a loan from the African Export-Import Bank.

While banks and most large retailers accept the proxy currency, many small stores, informal traders and taxi drivers will not or price them at as little as 70% of their dollar face value.

Hanke, who is also director of the Troubled Currencies Project at the Cato Institute in Washington, said the decision to issue the bond notes was a disaster.

“Zimbabwe is no longer a pure dollarised system but a mixed system, one that is bound to fail,” he said.

“More bond notes will only add fuel to the demand for hoarding of what is viewed as being the superior currency and store of value in Zimbabwe, the US dollar. As the issuance of bond notes increases in response to the hoarding frenzy, the premium on dollar notes to bond notes will widen and so will the distortions in the economy.”