Game is up! – Drama as Zim smashes black market
Already those who had vast sums in cash are panicking as the try and evade the restrictions on unexplained large cash deposits or purchases.
The chopping of the three zeros, as Mozambique also did this year, makes the currency more convenient for everyone and stops a modern economy from crawling to a halt while banks and businesses spend fortunes upgrading financial software and databases to cope with huge figures.
When a box of matches costs Z$20 000 and a loaf of bread Z$200 000, and when a street beggar is a millionaire, the average Zimbabwean was becoming bemused with large numbers. Banks and shop tellers were making more errors as clerks missed or added a digit into the huge numbers resulting from modest ordinary transactions.
And business was facing a meltdown as it found its expensive computer systems simply could not cope with trillions.
But the real gains from currency reform are coming from cancelling the old currency notes and bearer cheques, a sort of temporary bank note issued to cope with hyperinflation.
The Reserve Bank of Zimbabwe reckons there is old currency with a face value of Z$43 trillion old style in circulation. And less than a quarter of this, about Z$10 trillion, was actually being used for normal business and rotating through the banking system. The other Z$33 trillion was stashed in trunks in Zimbabwe and across half of Southern Africa. It was used for illegal foreign currency deals and business deals where no one wanted interference from the taxman.
A bank can now take deposits totalling only Z$100 million old style (about US$400 at the new official rate) every seven days without explanation from an individual, and Z$5 billion (about US$2 000) from a business. Everything over that requires a tax clearance certificate and a reasonable explanation.
All legitimate businesses already have tax clearance certificates for VAT and company tax, since it has been impossible to do much beyond back-yard hairdressing without such certificates for some time as a result of previous reforms. Very small businesses and the self-employed are basically taxed at 10 percent of turnover, this being deducted by those who contract them and their takings are well under the limits of maximum deposits.
Businesses with clearance certificates are having no problems in making huge deposits so long as these, adjusted for inflation, do not diverge too much from their previous deposit record.
But as queues of people with trunks and suitcases of cash started forming outside banks on Tuesday, the day after the currency reform was announced, others were sliding into shops and buying vast amounts of groceries, fridges, televisions and, in one known case, a fleet of 10 cars, all for cash.
So the Reserve Bank of Zimbabwe hurriedly blocked that loophole. No transaction can be for more than Z$100 million (old currency), that is about US$400, using currency notes. Anything larger has to be with a cheque or bank transfer. In other words those with trunks of currency have to get this into the banking system before they can do anything really useful in the way of large purchases.
Road blocks at border posts and
on highways into the cities were set up the evening of the announcement on Monday. Already hundreds of billions of old dollars have been seized as desperate traders try to get their cash to a bank with every nephew and niece mobilised to deposit the unexplained maximum.
Some businesses, such as wholesalers, are seeing vast increases in turnover, up to four-fold in some reported cases. It is suspected that those with huge cash holdings are travelling around with their trunks buying just under US$400 of goods at each shop, or using family members.
There are also rumours that rates and utility bills are being paid for several months in advance, which will help cash flows of councils and the Zimbabwe Electricity Supply Authority, but is the result of another loophole being exploited by the desperate.
Reserve Bank Governor Gideon Gono is now talking about slashing the period of the turnover from the original three weeks, with some sort of extension for modest sums from rural folk. He has been quite blunt about the reason. He wants as much of the currency hoarded outside the normal business and banking systems to simply disappear and what is left over be under the observation of bankers.
The ultimate in such a sudden demonitisation was the introduction of the German deutchsmark in 1948 in the three western occupation zones. Germans woke up one morning to find the old reichsmark was totally valueless and they had to queue for DM40 of the new currency. Everyone got that DM40, from the owners of Daimler Benz to beggars. No one got more and it did not matter how many reichsmarks were stacked up in your old bomb shelter. There were stories that some black-market traders suddenly found themselves with rooms full of nothing but stacks of what was now just fancily-engraved toilet paper.
The black market died that morning as hoarded goods suddenly appeared for sale and western Germany was set to rebuild an economy that in the end overtook those of two of the western occupation powers. Such a dramatic currency reform was only possible because the German economy was totally devastated and because outsiders held all the power.
The changeover announced by Gono, and backed by temporary laws made by President Mugabe, is less dramatic but has been designed to have minimum impact on ordinary Zimbabweans and legitimate business while having almost the same dramatic effect as Germany’s 1948 reform on the black market and under-the-counter dealings.
Economists have noted that if a significant portion of the missing Z$33 trillion (a little over US$130 million) does just disappear quite a lot of demand-push inflation caused by rapid rises in money supply disappears with the notes. A lot of the cash printed last year to cope with drought would be “unprinted” as a result.
Ordinary Zimbabweans are not really affected by the change over, except to find life easier since they no longer have to do huge mathematical sums when buying a few groceries and no longer need stacks of currency notes just to do a week’s shopping.
The largest of the old currency notes was worth just US40c, and since so many had been taken out of circulation and put into trunks, most people were having to use smaller denominations, especially at month end when most Zimbabweans were paid and banks found it hard to find enough higher denomination notes. That in turn led to intolerable supermarket queues as a teller and her customer had to count, and check, a pile of several hundred notes for a small trolley of groceries.
The new notes range up the equivalent of US$400, although some have moodily observed that these are likely to disappear under mattresses as the “black” economy is rebuilt. It was perhaps for that reason that Gono mentioned a second currency reform would be needed with a permanent set of currency notes before the reform movement was finalised.