We'll need bigger wallets.

Photographer: Desmond Kwande/AFP/Getty Images

Zimbabwe's Play Money Finally Gets the Axe

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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On Monday, Zimbabwe will start retiring its national currency: It will be exchanged at a rate of 35 trillion Zimbawean dollars per $1 U.S. Hyperinflation is probably the first word to come to mind,  yet Zimbabwe is actually in deflation, and it's not clear what new experiment it will be subjected to after the wildest monetary ride of any country this century.

Accounts of  Zimbabwe's  experience with money in 2007 and 2008  now read like fairy tales. The monthly inflation rate passed  50  percent in March  2007.  In March 2008, it was 3.5 million percent, and an egg cost 50 billion Zimbabwean dollars. A loaf of bread cost as much 12 new cars would have sold for 10 years before. It was no fun for Zimbabweans, who lugged plastic bags full of cash to market, but, remarkably, there was no rebellion against the men who had wreaked the havoc: President Robert Mugabe and Reserve Bank of Zimbabwe Governor Gideon Gono, a rich businessman with a Ph.D. from a Nigerian diploma mill and a direct line to Mugabe.

Gono's decision to turn on the printing presses was an act of desperation: Zimbabwe was under economic sanctions for chasing white farmers off their land, droughts were killing what agriculture was left, and Mugabe didn't know how to stop spending. Gono printed billion-dollar bills and exhorted merchants not to raise prices. It was even made illegal at one point.

It was also Gono, the central bank governor through 2013, who oversaw Zimbabwe's transition to the current multi-currency regime. It took a weakening of Mugabe's power and the formation of a coalition government for the plan to proceed, though Gono later said he'd planned it all. In 2009, the U.K. pound sterling, the U.S. dollar, the euro, the South African rand and the Botswana pula all became legal tender in Zimbabwe. 

Gono had stumbled upon a variation on Friedrich Hayek's idea of denationalizing money, allowing currencies to compete, though the Austrian economist envisioned private issuers, not foreign governments.

Initially, it worked. Average annual inflation between 2009 and 2013 was 3.3 percent. The economy took off, achieving more than 8 percent average annual growth. Admittedly, the baseline was almost zero: In 2008, Zimbabwe's GDP per capita, based on purchasing power parity, dropped lower than it had been in 1954, when the country was still a British colony. Still, things were going better than when the printing presses were busy.

For people on the street, however, the multi-currency regime has been another stress test. Every merchant had to deal in multiple currencies (in practice, mainly rands, U.S. dollars and pulas), and all of them were scarce, because Zimbabwe had neglected to make arrangements with the central banks that issued the currencies. The cash could only infiltrate Zimbabwe through trade or transfers from migrants (10 percent of Zimbabwe's workforce  is employed in South Africa). Gono's successor, John Mangudya, tried to make things easier last year by adding the Chinese yuan, the Australian dollar, the Japanese yen and the Indian rupee to the list of accepted currencies. But they are all pretty rare in Zimbabwe, and their introduction only helped companies from the four issuing countries that were doing business in the African nation, providing a hedge against currency fluctuations.

The scarcity of money boosts counterfeiting -- a big problem in Zimbabwe -- and depresses demand. Inflation has been negative since 2013. In an interview a year ago, Gono waxed eloquent about how badly the country was doing without him:

So, since 2009, Gono never printed a single penny. Gono never undertook any quasi-fiscal operation. Gono’s powers were clipped. For the last six months, from January to June 2014, Gono is nowhere to be seen. But what is the situation People are worse off than when Gono was there. The capacity utilisation of factories has gone so low (30%) that you can’t believe it; it is the lowest since records began. Poverty levels are far, far higher than they were in 2008. The banks can’t get any money. Civil servants, soldiers, police, pensioners, war veterans, and the rest of them are not getting their pay and pensions on time. But Gono is not there. Gono is gone!

Economists have been suggesting various solutions: reintroducing the Zimbabwean dollar (not a popular option); sticking to the U.S. dollar; moving to the rand, as two-thirds of Zimbabwe's exports go to South Africa. In any case, it will be another new situation for Zimbabweans to get used to, with new quirks arising along the way.

Through all this, Mugabe, now 91, continues to preside over the devastation. In 2013, he got rid of his coalition partners, winning the presidential election by a landslide -- or stealing it, if his opponents are to be believed.

More than a financial story, this is a tale of a people's endless patience. Mugabe took power with credentials earned as the liberator from colonization and was able to build a strong enough system of propaganda and  repression. He subjected his country to idiocy and torture, but many will still believe external foes are to blame. "You've sanctions and we've sanctions too," Mugabe reportedly told Russian President Vladimir Putin during a meeting last month in Moscow. "That's why we should remain united."

Perhaps Putin and other authoritarian rulers don't see him this way, but Mugabe has set a powerful example for them. Unwittingly, he has also created a cautionary tale for any dictator's subjects.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net