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dollars they trust
April 29, 2013
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The Economist website
The OK Mart
store in Braeside, a suburb of Harare, is doing a brisk business
on a sunny Saturday morning. The store, owned by OK Zimbabwe, a
retail chain, is the country’s largest. It stocks as wide
a range of groceries and household goods as any large supermarket
in America or Europe. Most are imports. For those who find the branded
goods a little pricey, OK Zimbabwe offers its own-label Top Notch
range of electrical goods made in China.
district farther south of the city centre looks rather less prosperous.
Food manufacturers and textile firms have down-at-heel outposts
here. Half a dozen oilseed silos lie empty. Only a few local manufacturers
are still spry enough to get their products into OK stores. One
is Delta, a brewer that also bottles Coca-Cola. Another is BAT Zimbabwe,
whose cigarette brands include Newbury and Madison.
economy is a legacy of the collapse of Zimbabwe’s currency.
Inflation reached an absurd 231,000,000% in the summer of 2008.
Output measured in dollars had halved in barely a decade. A hundred-trillion-dollar
note was made ready for circulation, but no sane tradesman would
accept local banknotes. A ban on foreign-currency trading was lifted
in January 2009. By then the American dollar had become Zimbabwe’s
main currency, a position it still holds today.
dollar had been too liberally printed: a swollen stock of local
banknotes was chasing a diminished supply of goods. Now the American
banknotes the economy relies on have to be begged, borrowed or earned.
Even so, the monetary system works surprisingly well. A scarcity
of greenbacks keeps inflation in the low single digits. The economy
has made up much lost ground.
was daunting, says Kevin Terry, the boss of CABS, a Harare-based
lender. Banks had to start almost from scratch. Inflation had wiped
out the value of both loans and deposits. “We had no customers,
no deposits, a bucketload of expenses and zero revenue,” says
A big question
was where the dollars needed to oil Zimbabwe’s banking system
would come from. The central bank could scarcely ask America’s
Federal Reserve for a credit line. Happily, the dollars came.
around a thriving informal economy washed into banks in search of
a return: in Zimbabwe banks will pay 12% interest on three-month
deposits. Dollars that had been squirrelled away in New York or
London came back to Zimbabwe. Some firms could fall back on foreign
credit: CABS borrowed $1.5m from its parent, Old Mutual Group, a
big insurer. Then came the hot money as violence
after disputed elections in 2008 receded and the economy recovered.
Bank deposits increased by 31% last year, to $4.4 billion.
This is no normal
banking system, however. The lengthiest term that savers are prepared
to lock up their money for is 90 days, so banks can lend only for
short periods. Terms are long enough for a retailer to turn over
stock, but not to finance the refit of a factory. There is no lender
of last resort if a bank runs short of cash or suffers a run. Lending
between banks is limited. Excess cash is often parked abroad rather
than lent locally. So liquidity has to be marshalled carefully.
Banks keep cash worth at least 30% of their loans in reserve, further
constraining how much they can lend.
The risk of
a run means depositors flock to the five biggest banks: CBZ, the
largest, and four foreign-owned banks. But the indigenisation policy
of Robert Mugabe’s Zanu-PF party, which requires foreign-owned
firms to hand over at least a 51% stake, clouds even this modicum
of financial stability. The immediate threat to banks has receded
thanks to an unlikely alliance between Gideon Gono, the central-bank
governor who is close to Mr Mugabe, and Tendai Biti of the Movement
for Democratic Change, who is finance minister in an uneasy coalition
drive is nonetheless another bar to much-needed capital spending.
Zimbabwean industry cannot compete with imports, in part because
its machinery is old, says John Robertson, a Harare-based economist.
Investment requires a long-term vision. Under hyperinflation the
long term was tomorrow. Now inflation is under control but long-term
credit is scarce. Last year’s trade deficit was $3.6 billion.
Zimbabwe has to attract yet more dollars to fill this gap. “The
country is borrowing itself into the grave,” frets Tony Hawkins
of the University of Zimbabwe.
in sunnier mood. People who have seen their debts eroded by inflation
are all too willing to borrow even at high interest rates. Retailers
are thriving. OK Zimbabwe is one of the few firms able to invest.
It raised $20m of fresh capital in 2010 and used the money to open
new stores and refurbish old ones. The firm coped with a month-long
transport strike better than its South African peers, says Albert
Katsande, its chief operating officer. Its dependence on imports
forces it to hold high levels of stocks.
A problem for
all retailers is a shortage of small change. One-dollar bills are
filthy from frequent handling. The South African rand is the main
currency in Bulawayo, Zimbabwe’s second city, and one-rand
coins are used in place of dimes all over the country. If coins
are short, a credit note or sweets may be offered instead. Items
that are frequent purchases have rounded prices. A loaf of bread
usually sells for $1.
own experience with money-printing, locals are queasy about “quantitative
easing” as practised by the Fed and other rich-world central
banks. Yet for all the printing of electronic dollars by the Fed,
the greenback is a hard currency in Zimbabwe. Few are clamouring
for its replacement by a local brand.
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