BUSINESS MAVERICK

Zimbabwe brings back US dollar peg for fictional currency

By Ed Stoddard 30 March 2020

A foreign currency trader holds Zimbabwean dollar notes and United States dollar notes on a street in Harare. (Photo: EPA-EFE / Aaron Ufumeli)

The Zimbabwe dollar, a fictional currency with fewer believers than Santa Claus, has fallen victim to Covid-19. The Reserve Bank of Zimbabwe has resurrected its peg to the US dollar.

Few economies are as ill-equipped to deal with the coronavirus pandemic as Zimbabwe’s. The ruling Zanu-PF party — responsible for the Matabeleland massacre, rigged elections and the destruction of an economy, to name just a few of its achievements — is fighting over the shrinking pie from which it dispenses patronage to its cronies. 

Maintaining the fiction of the Zimbabwe dollar, and its flow, is one of the last levers at its disposal to go about this without bringing in reforms that are long overdue. It is all playing out against the backdrop of a historic drought and a desperate shortage of hard currency, with inflation in February galloping to 540%. 

This has revived memories of the hyperinflation that ravaged Zimbabwe until 2009, when it dumped the Zim dollar, which no-one trusted, in favour of the US dollar. The government banned the use of the US dollar nine months ago and surging inflation has been one of the predictable results. In a U-turn, the central bank said on Thursday 26 March it was bringing back the peg to the US dollar. 

“Government, through the Reserve Bank, has suspended the managed floating exchange rate system to provide for greater certainty in the pricing of goods and services in the economy. In its place, the Bank has, with immediate effect, adopted a fixed exchange rate system at the current interbank level of ZW$25 to the US$. This measure will be reviewed when markets stabilise from the effects of Covid-19,” the central bank said in a statement.

According to the website marketwatch.co.za,  which monitors black market rates, the street rate is currently about 44.5, so the official peg is already being dismissed as fiction. Expect it to climb in the coming days.

The central bank also cut its lending rate to 25% from 35%. With an inflation rate north of 500%, none of these numbers makes much sense. 

Zimbabwe’s President Emmerson Mnangagwa — aka “The Crocodile” — came to power in November 2017 after a coup ousted Robert Mugabe. The coup was launched after it became clear that Mugabe’s wife Grace planned to take over from her husband and loot whatever was left of the economy.

It simply slowed down the pace of looting and Zimbabwe’s government now has no effective policy tools left at its disposal. It is hard to dispense patronage when the coffers are empty. Expect the greenback’s comeback in Zimbabwe to be complete soon. That is, if there are any dollars left there. BM

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