After scrapping the national currency in 2009 when its inflation rate soared to an unbelievable 89 sextillion percent, Zimbabwe turned to foreign currencies which was a breath of fresh air for those who saw their savings become worthless. But now, the African country is facing an unprecedented cash crunch leaving many to search for a solution.
At the end of 2016, Zimbabwe’s central bank began issuing “bond notes,” or “bollars,” a paper currency-like note officially carrying the same value as the U.S. dollar. Backed by a loan of US$200 million from the African Import Bank, the notes were created in an attempt to ease shortages of U.S. dollars and South African rand.
The small denomination “bond notes” are not easily exchangeable in the market, leading businesses to turn to the black market to sell the notes at a premium in order to secure U.S. currency to purchase imported goods. This has forced higher prices on customers paying with the “bond notes.”
Chantelle Matthee, an analyst at NKC African Economics in neighboring South Africa, explained: “Firms’ prices reflect that one U.S. dollar in hard cash is equivalent to $1.30 in bond notes, meaning that the surrogate currency has already lost 30 percent of its value.”
While officially consumer prices rose only 0.6 percent year-on-year, in the real world, there are reports of merchants charging upwards of 40 percent for goods.
Zimbabwe’s government took this crisis to the next level, however, when diving into the electronic payment system. Nicknamed “zollars” by economists, the central bank began creating dollar surrogates lacking sufficient dollar or gold reserves as a backing.
As the rumor mill churned, word began to spread that the government had run out of U.S. dollars and was buying up black market dollars to hedge against their failing system. These rumors sent the price of “zollars” plummeting, placing a steady 20% premium on greenbacks, leading many to recall the 2009 economic crisis.
Jethro Nkosi, a computer technician in Harare noted: “I am really scared that I will wake up one day and find my money in the bank is worthless,”
Amid this cash shortage, President Mugabe announced a huge shake-up in the administration, axing 3 ministers, including finance minister Patrick Chinamasa. Additionally, Mugabe created a new cyber ministry, focusing on cybercrime and monitoring of social media.
The move to create a cyber ministry was largely rooted in controlling what the administration suggested was the spread of misinformation including the previously mentioned rumors, which government suggested created panic buying and price increases.
While Mugabe’s administration struggles to gain control of its financial woes, many citizens of Zimbabwe are turning to alternatives.
As it becomes increasingly difficult to engage in foreign trade, many businesses are facing collapse. Because of this, a number of savvy industrialists are looking to bitcoin to engage in international trade and preserve their wealth.
Businesses and individuals scrambling for solutions has since sent the exchange rate skyrocketing in Zimbabwe. On Monday, October 16, the current rate on the country’s primary bitcoin exchange, recently renamed Golix.io is $10,000USD/1BTC. It is worth noting that the trading price on Zimbabwe’s Localbitcoins.com is about equal to the globally weighted average.
Despite the premium on the country’s only exchange, bitcoin is gaining speed in Zimbabwe. As the country’s banking system faces increased scrutiny and international transactions become more difficult, the cryptocurrency offers a new solution which could change the face of Zimbabwe’s financial system.
Bitcoin advocate and Zimbabwe based economist Philip Haslam explains: “The thing about bitcoin is once you import it into the country, you don’t have the problem of the currency eroding and perishing like you have with notes — It’s a system that allows for privatized banking.”
Featured image from Pinterest