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How’s Zim so poor and yet so expensive? (Part 1)

05/01/2014 00:00:00
by Michael Hobbes I Newrepublic.com
Economy headache ... President Robert Mugabe
New Economy: Poor pay, no contracts
Zanu PF legislators increasingly vocal
Record nine firms liquidated in one day
Economy slides backwards under Zanu PF
Zim braces for new financial crisis
Moyo mocks Tsvangirai economy warning
Zim headed for tough 2014: Tsvangirai
You won’t get $4.4bln, Chinamasa told
Biti in withering attack on ‘ailing’ Mugabe
Zim to lobby for $6.1b debt write-off
Zimbabwe secures $53m from AfDB
Tsvangirai calls-off key economy talk
Gono for Finance as Cabinet rejig looms
More firms to quit ZSE as economy struggles
EX-PM meets ZCTU as party warns of unrest
No Makandiwa miracles on economy
Chinamasa: Foreign banks sanctioning us
Economic crisis hits women, children hard
World Bank slams door on Zim support
Imports from SA up 20pc, reach $1.6bln
Zim price madness: What hope? (Part 2)

THE first thing you notice about the money in Zimbabwe is that it's filthy. The bills have been passed back and forth so many times the numbers are almost rubbed off. The second thing you notice is that there are no coins. Prices are in dollars and cents, but when you pay, the stores round up and give you your change in store credit, phone minutes, or lollipops.

The next thing you notice - the thing you keep noticing - is how expensive everything is. A five-minute cab ride to the grocery store is $7. Once you get there, a Coke is $2. A jar of peanut butter is $4. Thirty-two ounces of yogurt is $5.

I'm confused. Zimbabwe's per capita GDP is $600, the third lowest in the world. The average wage is $253 a month - and that's for the 30 percent of the population who are employed. The highest government salary is $508 per month. I ask around, and it's not just the expat supplies that are expensive. All the basics - sugar, maize, eggs, cooking oil - are more expensive in Zimbabwe, kilo for kilo, than they are in Zambia, Botswana, or even South Africa, where the average wages are 19 times higher than they are here. 

I am in Zimbabwe for a human rights research project. I spend every day meeting NGOs, government officials, and international organizations, getting stats on what is broken here, on how to fix it. But I'm becoming weirdly obsessed with the price thing. I get a haircut before a conference and it is $20. I get a two-week membership at a gym and it is $60. Before I know it, I'm ending official interviews with “So why is the yogurt five bucks?”

What people tell me is that the prices are a lingering legacy of hyperinflation, the decade when Zimbabwe went through the Industrial Revolution in reverse. They tell me everything is imported, that the supermarkets buy their food from South Africa, double the prices, and put them on the shelves. They tell me Zimbabwe switched to U.S. dollars without having enough of them to go around.

Over the next three weeks, I ask Zimbabweans how they are getting by, how they afford to live with this imbalance between cost and income. Things may be tough, they tell me, but they're way better than they used to be.

Hyperinflation hangover

The first explanation I hear for the high prices is that they are a hangover of hyperinflation. After nearly a decade of rising prices, when a carton of eggs cost 100 Zimbabwe dollars, then a thousand, then a million, then a billion, no one notices the rise from one dollar to two, from five to ten.


The first person I speak to properly about this is Colin, who messages me on Grindr one weeknight and agrees to meet the next day at Avondale Shopping Centre, right next to the grocery store where I’ve been marvelling at the prices. (He asked me to change his name. Homosexuality is illegal in Zimbabwe, and talking to foreign writers about your country isn't exactly encouraged.)

“In 2008,” he says, “they had people running around that store with label makers, changing the prices three, four times a day.” Colin was born and raised in Zimbabwe, but now spends half the year in Kenya. Tall and thin in a polo shirt, he looks like a tennis pro. We order $4 cappuccinos and I ask him why they cost that much.

"It wasn't always like this," he says. "There was a time when it was cheap to live here.”

It may sound surprising now, but for a few years, Zimbabwe was one of Sub-Saharan Africa’s major success stories. Emerging from independence with a productive private sector, robust infrastructure, and a charismatic leader named Robert Mugabe, Zimbabwe spent the '80s and early ‘90s achieving some of the best infant mortality, primary school enrolment, and life expectancy figures in the region.

And then, in 1997, it all started to fall apart. Facing restless constituents and an increasingly popular opposition, Mugabe embarked on a series of pay-outs to placate voters and neutralize political rivals. In 1997, it was 50,000 Zimbabwe dollar (about $3,000 at the time) payouts to veterans of the war of independence. In 1998, it was sending troops to help secure Congolese diamonds. In 2000, it was 90 percent raises for civil servants, stacks of "project money" handed out at political rallies.

Zimbabwe wasn't just spending more, it was also producing less. Starting in 2000, Mugabe implemented a land reform program in which thousands of commercial farms were confiscated from their traditional (i.e. white) owners and gifted to Mugabe's friends and cronies. Few of the new owners knew how to run a commercial farm, and some simply fired all the employees and sold the equipment for parts. Agricultural exports, the backbone of Zimbabwe’s economy, went into free fall.

This is when Zimbabwe started to look like the country we all read about in 2007 and 2008. The cratering of the agricultural sector cascaded through the economy. Banks holding mortgages for confiscated farms went bankrupt. Tax revenues plummeted.

Cratering agriculture

“The government had these huge bills, but no way of paying them,” says Godfrey Kanyenze, the director of the Labour and Economic Development Research Institute of Zimbabwe. “Production simply collapsed.”

All the while, the Reserve Bank was printing money to fill the gap. By 2007, inflation was 7,982 percent. Zimbabwe had let go of the balloon, and there was no way to get it to come back down. Factories didn't have the currency to import raw materials, so they cut production, laid off workers. Power outages went from weekly to daily as the country ran out of money to pay its neighbours for coal.

Tapiwa Chagonda, a senior lecturer at the University of Johannesburg, did a survey of public school teachers in Zimbabwe during this period. In October 2008, their salaries were 729,000 Zimbabwe dollars per month, the equivalent of 72 U.S. cents.

“They just stopped going to work,” he says. “It was a waste of time.”

At the height of the inflation, as unemployment neared 90 percent, unions were holding salary negotiations every week. Hospitals, unable to purchase medicines or pay doctors, closed down. Some schools accepted food as payment. An estimated 2 million people, or nearly one-sixth of the population, emigrated.

Colin introduces me to Lovemore, now a gardener in Harare. In 2008, he walked away from his vegetable patch in Chipinge when he couldn't afford seeds for the next harvest. He took a bus to the South African border, swam across the Limpopo River and walked until he made it to a farm and asked if he could work there. He stayed two years.

For those who stayed in Zimbabwe, there was no option other than resorting to the black market. Zimbabweans lobbied family and friends living abroad to wire in foreign currency and drove to South Africa, filled their cars with sugar, maize and cooking oil, drove back home and sold them at double the price.

Neighbourhoods chipped in to buy pallets of food from South Africa, selling it piecemeal at intersections or parking lots. Almost 90 percent of the population was getting food or cash or both from abroad.

Just guessing prices

“You woke up one morning and realized you were penniless,” Colin says. “The supermarkets were rows of one or two cans of food on the shelf. You would have to hunt around for a loaf of bread. Housewives, that's what their day was, going to all the stores, foraging.”

It was illegal to trade in foreign currencies, so all the shops had to charge Zimbabwean dollars. The U.S. dollar and South African rand quietly became the only currencies that had any meaning. Colin was running a bed and breakfast at the time, and he paid his employees their official wages in Zimbabwe dollars - “some ungodly number with nine zeroes after it” - then give them their real wages in an envelope full of U.S. notes.

The World Bank refers to this period as the “de-industrializing” of the Zimbabwean economy. By 2009, the private sector was operating at 10 percent of its former capacity. Other than a trickle of tobacco exports, farms withered back to prairies. All of this - the inflation, the importing, the U.S. dollars, the black market - pushed up real prices.

“Even bread at some stage became a luxury,” says Tapiwa Mhute, an economist at Consultancy Africa Intelligence. “People couldn't afford milk and sugar to put in their tea. People were diluting juice for their kids.”

This is what people mean when they say the high prices are a legacy of hyperinflation. When the economy finally adopted the U.S. dollar in 2009, the stores had no idea how much they should charge, and the customers had no idea how much they should pay.

“There was no scientific basis to pick the new prices,” says Kanyenze.

Here’s how Colin explains it: If you woke up tomorrow and found that the U.S. had adopted, say, the yen as its official currency, you would still have a rough idea of what things should cost. If the cafe next door charges 300 yen for a cup of coffee, you know that's about three bucks. You decide that's a fair price, you pull the notes out of your pocket and pay.  

But switching from a hyper-inflated currency to a stable one is not is not like Europe adopting the euro in 2001, or waking up tomorrow and finding all the prices in yen. It is like waking up tomorrow and finding all the prices in pinecones, or hugs.

When Zimbabwe adopted the U.S. dollar, prices in the formal economy were doubling every 24 hours, and the actual economy, the one in foreign currencies out back, had been whittled down to just a few extortionate essentials. The relationship between the currency and the economy—that sense of 'fair' vs. 'unfair' prices—had to be built from scratch.

“People had no sense of the value of a [U.S.] dollar,” Colin says. When the economy dollarized, “stores were just buying up South African products, putting a 100 percent mark-up on them and putting them on the shelves.”

In other words, dollarizing the economy didn’t just bring the market back in from the parking lot, it brought the prices in with it.

Dollarisation without the $s

Price-gouging after hyperinflation can't be the whole story. Yes, the stores might have set their prices high when Zimbabwe dollarized, but that was four years ago. If it was that easy to fleece consumers, everybody would have started doing it and the competition would have driven prices back down. There has to be more to it than that.

I am telling this to a woman I’ll call Sandra. She runs a farm outside Harare whose products include the yogurt I have been eating most nights because my per diem won't cover the $25 dinners at my hotel. Sandra managed to hold on to her farm through the land reform, through hyperinflation and now through dollarization.

“You want to know why our yogurt is five dollars?” she says. We are sitting at a Thai restaurant in the Harare suburbs. At the next table a Chinese businessman chats with his wife as his teenage children Instagram their meals.

“We have to import everything,” Sandra says. “Everything.” For yogurt, that means the milk powder, the bacteria, the processing equipment, even the water, comes from South Africa. “We could even import the milk,” she says. “The only reason we have the cows here is because we don't want to lay off our workers.”

This, it turns out, is another legacy of hyperinflation. Dollarization might have brought goods back to the stores, but it didn't bring productivity back to the economy.

“Five or six years ago, Zimbabwe used to produce 70 percent of the goods we sold,” says Dave Mills, the managing director of TM Supermarkets, one of Zimbabwe's largest grocery chains. “Since the dollar, now we import 70 percent of our products. At least 95 percent of those imports are from South Africa.”

This is an expensive way to operate. Keeping milk, bread, and eggs fresh for 12 bouncing hours from a South African farm to a Zimbabwean grocery store adds a huge premium.

And that's not the only high cost. Electricity is unreliable, so you build in your own generator and feed it gas at $6 per gallon. Broadband Internet starts at $200 a month. Phone bills are among the highest in Sub-Saharan Africa.

But the most expensive thing about running a business in Zimbabwe, it turns out, is money itself.

Zimbabwe officially dollarized on January 29, 2009. That's the day the acting finance minister, Patrick Chinamasa, submitted a budget to parliament in both U.S. dollars and Zimbabwe dollars (It's a surreal read: “I also propose to allocate $175 quadrillion (US $5 million) to cover importation of grain...”) and allowed stores to start trading in whatever currency they chose.

Almost overnight, Chinamasa’s budget stabilized the economy. Stores could finally accept U.S. dollars and South African rand, the currencies people had been using on the black market for years.

What the new budget didn’t do, however, was give any specifics about how the new economy would run itself. Bank regulations, government accounting practices, the conversion of millions of rent and employment and procurement contracts to the new currency: that was left to the individuals holding them.

The budget also didn't specify how Zimbabwe was going to get the new U.S. dollar notes it needed to feed its new U.S. dollar economy. In 2009, Zimbabwe had just $6 million in U.S. notes in reserves.

“It's not like they called the Fed and ordered X million dollar bills and X million quarters and nickels and dimes,” says Vince Musewe, a Zimbabwean economist. “They just switched.”

This is why you never see coins here. The economy had to run on the dollars that were already in circulation, the ones remitted in from Western Union or purchased on the black market. There were no shipping containers full of cash waiting offshore to fuel the new economy.

No one banks their money

The banks were the hardest hit. Amazingly, the financial sector actually earned money during hyperinflation, driven by speculation and its investments in Zimbabwe's stock exchange, which - again, amazingly - rose by 12,000 percent as the economy vaporized around it. Neither of these things makes any sense to me, but economists say that people were so nervous about keeping their money in money that they invested it in goods - real estate and stocks - instead. 

All that ended with dollarization. The banks needed hard currency - deposits from customers - to make loans and earn interest. As late as 2011, only 20 percent of Zimbabweans even had a bank account, and those who did weren't exactly leaping at the chance to put their money back into the institutions where their life savings had inflated into oblivion.

“The system doesn't have any fuel in it,” Musewe says. “If you go to the bank, they've got 16 counters, and only two are open. It's all people taking out money, not putting it in.”

In most countries, the government is the lender of last resort, the place where banks borrow money so they can loan it out. But the Reserve Bank of Zimbabwe can't do that, it's just as broke as the banks. In January of 2013, the finance minister announced that, after paying civil servants, the government had just $217 to its name.

“If we borrowed money in Zimbabwe right now,” says Mills, the supermarket executive, “it would be at 15 to 20 percent interest.”

Just like hyperinflation, the high cost of money cascades down through the economy. Mills tells me that in most countries, supermarkets pay for products 30 to 45 days after they order them. In Zimbabwe, you pay up front. New refrigeration systems, air conditioners, tracks of fluorescent lights, they all cost 50 percent, up front, in cash.

“Everyone else has a shortage of working capital too,” Mills says. “So they want to be paid today.”

The farms selling to the supermarkets, like Sandra's, can't borrow money to buy more cows, hire more workers, or update their equipment. The manufacturers can't invest in employee training or expand to take advantage of economies of scale. Shops and restaurants, even if there's a line of customers around the block, can't borrow money to open more locations.

The year after dollarization, the inflation rate was negative 7.7 percent, the prices adjusting as the shortages eased and the economy formalized. Since then, though, the prices have stalled. Mills tells me that at his stores, a 10 kg bag of mealie meal, Zimbabwe's staple starch costs between $6.50 and $7.50. That's less than it cost in 2009 ($15), but as Zimbabweans point out to me again and again, it's still more expensive than it is in South Africa ($5), a country with far higher wages.

So if the prices haven't dropped, how are people in Zimbabwe, a country where the median income is about $6 per day, getting by?  To be continued ….


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