Bitcoin surges in Zimbabwe as financial system falters

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‍Political volatility has hit Zimbabwean financial markets leading to a spike in the US dollar/bond note parallel exchange rate and a surge in bitcoin prices in the country.

This week, as Zimbabwe’s military stormed the capital city of Harare and placed longtime president Robert Mugabe under house arrest, rising demand pushed bitcoin prices on Harare's bitcoin exchange Golix as high as 13,499 US dollars, almost double the rate in international markets. Since its independence in 1980, Zimbabwe has been ruled by Mugabe.

The high bitcoin demand surrounding worry of mass collapse reflected the country’s already fragile and almost non-existence currency system.

Zimbabwe doesn’t have its own currency, with the US dollar and South African rand, among others, accepted as legal tender since 2009 after hyperinflation left the previous currency worthless.

Hyperinflation to deflation through US dollar

Zimbabwe’s hyperinflation followed the government’s land reform in the late 1990s which aimed at ending decades of farm ownership by white landlords.

During the colonial era, the best farmland was reserved for the white population and in 2000, Mugabe spearheaded the seizure of the land from about 4,500 white-owned commercial farms.

Zimbabwean President Robert Mugabe addressed a meeting of the ZANU-PF Central Committee in Harare Sept. 8, 2017. /Xinhua Photo

Many governments suspended aid payments to Zimbabwe as a result of this.

Mugabe’s critics say the land was handed out to his political allies and many of the beneficiaries were not given the equipment or training to farm productively, leading to the collapse of the agriculture-based economy.

It has been reported that some of the best acreage fell into ruin because senior ruling party officials who took it over had no farming expertise. Other farms also failed because they were given to small producers with no money to pay for fertilizer and equipment.

From a rate of 57 percent in 1999, inflation was running at almost 600 percent by 2003 and, in 2006, it hit the scarcely-believable rate of 1,200 percent.

The following year it hit a rate of 66,200 percent and, by July 2008, surged to 231,000,000 percent.

A Zimbabwean held a new 10 million Zimbabwe dollar note after withdrawing cash from a local bank in Harare on Jan. 18, 2008. /AFP Photo

With high interest rates strangling economic growth, the country’s involvement in the civil war in the Democratic Republic of Congo further piled up debts.

Facing the economic crisis, the government’s response was to declare inflation illegal by redenominating its currency three times (in 2006, 2008 and 2009).

The upshot of all this was that, according to the World Bank, Zimbabwe's total GDP shrank from 8.6 billion dollars in 1991 to 4.4 billion dollars in 2008.

In 2009, the government threw in the towel, agreeing that using other currencies - notably the US dollar, the South African rand and the euro - was no longer illegal.

This remedy attempt did spark a recovery of sorts.

In 2009, prices in shops fell for the first time in five years and, later that year, in response to Mugabe's agreement to share power with the opposition leader Morgan Tsvangirai, the International Monetary Fund agreed a 400-million-dollar support package.

Zimbabwean GDP rallied to 8.4 billion dollars in 2009 and has risen every year since, according to the World Bank, hitting 16.3 billion dollars last year.

It was predicted to grow by 2.8 percent this year, according to the IMF.

Yet growth has stalled in recent years. The economy grew by just 1.1 percent in 2015 and by just 0.5 percent last year.

With agriculture as the backbone of the economy, Zimbabwe is a fertile country, heavily dependent on exports of resources, such as tobacco, gold, diamond and platinum.

Would post-Mugabe era be better?

An armored personnel carrier stationed at an intersection in Harare in Zimbabwe on November 15 2017. /AFP Photo

After a short period of economic stability, severe shortages of dollar cash have set in, leaving Zimbabweans with electronic units in their accounts which are officially dollars but in reality worth far less and depreciating fast.

Ordinary Zimbabweans can use currency in their bank accounts, nicknamed “zollars”, to pay for goods and services at home by debit card or mobile phone transfer. However, getting hold of foreign currency through official channels for an international transfer is almost impossible. Some Zimbabweans are turning to the volatile bitcoin to try to preserve their savings.

“Widely reported cash shortages and the shift to listed equities as an alternative to bank (accounts) suggests that this economic model is breaking down again - the last time this occurred was in the hyperinflationary run-up to dollarization in 2009,” Hasnain Malik, global head of equities research at Exotix Capital, wrote in a note to clients.

Many predicted there would be no going back for Zimbabwe with the military intervention designed to cut off Mugabe’s succession plans. But for many analysts, it was too early to tell what the future would hold for Zimbabwe.

Emmerson Mnangagwa. /AFP Photo

Enthusiasm about the possibility of Emmerson Mnangagwa, a feared former security chief known as “Crocodile”, taking over is limited, as Mnangagwa inspires little hope he would behave less thuggishly.

Mnangagwa served as the vice president of Zimbabwe from 2014 until his dismissal earlier this month, shortly before the military take over.

The last thing Zimbabweans need is brutal repression and economic ruin.

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