Hyperinflation is making an unwanted return to Zimbabwe. We don’t know how bad it is because the government has suspended publishing official figures until 2020. But an IMF mission to the country in August put the rate at close to 300% annually. More recent market estimates based on local currency depreciation imply rates as high as 400%.
This, sadly, is not new to Zimbabwe. Between 2007 and 2009, the country experienced one of the world’s worst cases of currency collapse, with inflation rates as high as 90 sextillion percent year-on-year in November 2008.
But there is an important distinction between now and then. This time hyperinflation is hitting an almost fully digitised monetary economy due to the proliferation of mobile payments in the country. EcoCash, Zimbabwe’s equivalent of Kenya’s better-known M-Pesa system, counts as much as 90% of the adult population as customers. It is an open question whether that scale of digitisation will act as a brake or an accelerant on inflationary forces. But so far it is not looking very beneficial.
Last time, the hyperinflation crisis was eventually tempered by an official transition to a multicurrency framework. This amounted to an informal dollarisation of the economy.
By 2016, however, a serious lack of foreign currency in circulation began to threaten the system’s stability. EcoCash, by facilitating demonetisation, may have heightened those pressures.
As it was growing in popularity and serving the unbanked, EcoCash’s nationwide network of agents sucked dollars out of the hands of the population, turning them into digital balances. This amounted to the transfer of foreign cash stock from citizens to the banking system, with the money ending up in the control of the central bank. That is all fine if you trust the core banking system. Not so much if you do not.
The government has also encouraged the demonetisation by paying salaries in EcoCash. As the dearth of dollars intensified over the course of 2016, officials began to experiment with local alternatives to ease pecuniary pressures. The first step was electronic Zim dollars, known as zollars, backed by theoretical US dollar credits on a one-to-one basis. The so-called bond note and bond coin followed. But nobody really trusted the credits were actually there, putting pressure on the dollar peg.
By 2019, the illusion of a peg was long gone. So the government took more drastic action, creating a quasi currency called the RTGS dollar and declaring it official local tender. It also banned the use of foreign currencies except for special-use accounts. All government salaries and official contracts were redenominated immediately.
The exchange rate at that point was set at 8:1 to the US dollar. But the demand for paper US dollars never went away, encouraging a free-market exchange rate that has since reached as much as 21:1 to the US dollar.
And here EcoCash played another destabilising role. As demand for US dollars rose, citizens figured out they could offer EcoCash agents premiums and additional commissions in exchange for hard cash. Outages and glitches became more common.
In September, the government moved to prevent “illegal activities abusing the cash-in, cash-out and cash-back facilities” and the “buying and selling of cash through mobile money agents at high rates above approved charges”. It officially suspended all of EcoCash’s cash-in and cash-out activities. But the move was hugely unpopular, leading the government to reinstate a limited cash-out option with a $100 per transaction cap earlier this month.
Since then, EcoCash’s social media accounts have been inundated with reports of failed transactions and delays. That implies something critical. Mobile money may be a highfalutin fintech innovation, but it’s just as prone to Gresham’s law — bad money drives out good — as the old-fashioned sort.