Bags of bricks

Aug 24th 2006 | JOHANNESBURG
From The Economist print edition

A most unusual shopping spree has just taken place in Zimbabwe. At the end of July the central bank devalued the Zimbabwean dollar (Z$) by more than half and then announced that the currency would also lose three zeros. This is the bank's latest idea to fight hyperinflation hovering around 1,000% a year—the highest in the world—and to attract cash into the banking system. Zimbabweans had until August 21st to get rid of the old bearer cheques used as banknotes. Whatever they could not exchange for the new currency, they spent. Gideon Gono, the governor of the central bank, suggested that the change be called “from zero to hero”.
Banks were swamped with customers trying to hand in their cash before the deadline. Anyone willing to deposit more than Z$100m ($400) a week—Z$5 billion for businesses—had to explain where the money came from or risk having it forcibly converted into one-year bonds or confiscated. New bearer cheques could be withdrawn against what had been deposited, subject to strict ceilings. The police searched people for large amounts of cash at roadblocks. Those stuck with extra money had to spend it before it became worthless. Shoppers frantically filled trolleys before the deadline.

Spiralling inflation has forced Zimbabweans to use bags to carry cash: wallets are a distant memory. It takes time for cash machines to spit out the daily maximum of Z$250m—or Z$250,000 in new money—that people are allowed to withdraw, so queues have become common. Zimbabweans have become used to dealing in “bricks”, as piles of banknotes worth Z$10m are known. Businesses send their money by trucks to banks' special bulk-cash facilities. Computer and accounting systems have been close to collapse, struggling to cope with sums in the trillions.

It is hard to see how scrapping three zeros and forcing people to bank their cash will stop prices spiralling. The central bank is calling for stringent monetary and fiscal policy, but has no power to force the government to tighten the purse strings. It partly blames inflation on speculation in the property and parallel foreign-exchange markets, but it has shown little restraint in printing money. Zimbabwe, the region's breadbasket before the government launched a disastrous land reform in 2000, is now hobbled by shortages of food, petrol, other basic commodities and hard currency. The economy has been contracting fast, and unemployment is estimated at over 70%. Many Zimbabweans rely on support from the 3m relatives or friends thought to have left the country.

Zimbabwe's woes cast serious doubt over the integration plans of the 14-country Southern African Development Community, which held a summit in Lesotho last week. Those attending voiced concern over Zimbabwe, which used to be the region's second-largest economy after South Africa. But it ended with the usual promises to speed up integration, create a free-trade zone within two years and establish a common currency by 2018. A common market, let alone a monetary union, looks like a distant dream. Probably not for the central bank's Mr Gono though: he expects Zimbabwe to have single-digit inflation by the end of 2008.