How a "giant Ponzi plan" destroyed Zim's economy

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Nearly two decades of sustained monetary policy have destroyed the Zimbabwean economy and fueled inflation, which has cut public savings twice.

A hyperinflation of up to 500 billion percent in 2008 made savings worthless and led to the replacement of the local currency in favor of the dollar the following year.

In 2016, Barackt's government of former President Robert Mugabe introduced securities called Bond Notes, which had insisted on trading the dollar. In 2018, it separated cash from electronic deposits at banks without reserves to hedge them, causing the black market rate to fall.

Last week he threw in the towel, allowing trading in debt securities at a market-driven level, which in turn limited the value of savings. The decision was made after the South African nation faced food and bread shortages, was hit by strikes and protests, and President Emmerson Mnangagwa's efforts to attract new investment failed.

"The currency crisis is at its root," said Derek Matyszak, a Zimbabwean research consultant for the South African Institute for Security Studies. "This is analogous to the fact that they created a huge Ponzi scheme that was created under Mugabe. What we are seeing now is the collapse of the Ponzi scheme. "

"1-to-1 fiction"

The recent move, welcomed by the rest of the country's economy, is unlikely to solve Zimbabwe's problems as it merely reflects black market exchange rates, said Steve H. Hanke, a professor of applied economics at Johns Hopkins University in Baltimore.

"The 1: 1 is a fiction," said Hanke. "They officially say we approve of what happened anyway. It's officially said, "We robbed you."

The interbank rate for the new currency is about 2.5 dollars, according to data published on the website of the Central Bank. This number is meaningless because the authorities are not disclosing the volume of trade, according to Marketwatch.co.zw, a website run by financial analysts. The black market rate for the bonds is estimated at 3.36 per dollar.

The origins of the Zimbabwean currency crisis go back to a violent land reform program initiated by Mugabe in 2000, which shrank export revenues and destroyed state finances.

Zimbabwe Reserve Reserve Governor Gideon Gono, known as the "God banker" for his close association with Mugabe, exponentially increased pressure from Zimbabwe's dollars to pay the government's workers, boost inflation, and finally the Make currency worthless.

print money

"It was a Ponzi plan in the past," said Ashok Chakravarti, an economist and lecturer at the University of Zimbabwe. "Especially in the gono era, where the guy just continued to print money." Gono did not answer a call to a mobile phone number he used in the past.

The collapse of the currency has created the predicament that is now Zimbabwe – a chronic liquidity shortage and rampant inflation.

By the end of 2008, some Zimbabweans had returned to barter when illegal foreign currency transactions flourished. In February 2009, the government's response was to switch to the use of foreign currencies, especially the US dollar.

"The dollarization makes the system difficult to budget," said Hanke. "You can not go to the central bank or any other state institution to get credit for the government."

Repay debts

The pressure on public finances made history repeat itself, leaving a gap: the introduction of debt securities and locally-based electronic money. According to George Guvamatanga, the permanent secretary of the Treasury Department, the amount of money in circulation rose to over ten billion dollars. The figure was $ 6.2 billion in 2013, said Tendai Biti, a leading opposition leader and former finance minister.

"If you continue to print money, you destroy what you do," said Guvamatanga. As part of a stabilization program introduced by Finance Minister Mthuli Ncube in October, the government is now repaying domestic debt, has stopped issuing treasury bills and has not overdrawn the central bank.

This has helped the economy "to walk on two legs, there are efforts to go in a different direction. It is an inevitable adaptation. Chakravarti said, "It is very unfortunate that this is the second time in ten years that people have lost the value of their savings, and in 2009 we fell back to zero, including myself."

For some observers, the recent trend is not a sudden discovery of budgetary discipline. It is another commitment to failure, and the victims are the people of Zimbabwe.

Zero savings

For Biti, who says that the new currency will fail because it is not covered by reserves, it shows that the country has closed the circle.

"It's theft because people have regrouped and rebuilt their lives from zero to the US dollar," he said.

The country's biggest hope is to join the common currency area in southern Africa, which is dominated by South Africa and its border, Biti said. This would give companies security and impose fiscal discipline on the government, in contrast to the current rules, which are not sustainable, he said.

"It's a Ponzi economy," he said.