Zimbabwe’s Currency Crisis: the worthless $100 trillion

Life in Zimbabwe has never been easy. Since its independence, the Southern Africancountry has seen factional violence, international sanctions, and rampant political instability. But in the mid 2000’s, it lost somethingeven more fundamental: its currency. Surviving meant waking up as early as 2 inthe morning, trekking to the nearest ATM, and then waiting in line. On a good day, you’d be able to withdrawthe equivalent of about one or two US dollars – the maximum allowed by the government. Or, you might find, after losing sleep andwaiting for hours, that no more money was left. That’s because, around 2007, Zimbabwe experiencedthe second highest inflation in history, after Post-War Hungary. It’s hard to know exactly how bad it got,as the government stopped reporting numbers after 100,000% inflation, when a loaf of breadcost 30 billion Zimbabwean dollars. Employees stopped going to work when theirannual salary wouldn’t even pay for their bus ride home. And vending machines were put out of service- unable to hold the billions of coins that a single can of soda would cost. To keep up, the central bank kept printingbigger and bigger banknotes – a million dollars, one hundred billion, and, finally, one hundredtrillion – worth a whole 40 US cents. So, how did Zimbabwe get here? And how did this devastating economic crisishelp launch Africa’s financial technology revolution?

Zimbabwe is home to the largest waterfallin the world: Victoria Falls – over twice the height of Niagara, and whose tumblingwater can be heard 40 kilometers, or 25 miles away. Further South are the intricate stone ruinsof an 11th century palace city. And savannas everywhere in between hold Africa’sBig Five: lions, leopards, elephants, buffalo, and rhinos. Unfortunately, few will ever get to see thesewonders. Because, in addition to being blessed withnatural beauty, Zimbabwe is also cursed with an abundance of gold, platinum, coal, anddiamonds. All things which led Cecil Rhodes of the BritishSouth Africa Company to invade the land with the newly invented Maxim Gun at the end ofthe 19th century. The company-run territory was almost entirelygoverned and exploited by the tiny white minority. Years later, two rival factions emerged: Zimbabwe’sAfrican People’s Union, supported by the Soviet Union, and the National Union, backedby Mao’s China. In 1980, Zimbabwe gained its independenceand the National Party won its first election. Almost immediately, with the spirit of nationalismstrong, leader Robert Mugabe began doing what all good dictators do: consolidate power. His army, trained by North Korea under KimIl Sung, began murdering dissidents. He granted himself the power to dissolve parliament,declare martial law, and removed all term limits. Mugabe’s authoritarian rule lasted 37 years,just 4 short of Africa’s record, and teemed with corruption. He once accidentally let slip that his opponenthad won 73% of the vote in the last election before quickly correcting himself. This insatiable thirst for power had morethan political consequences. In 2000, his government began forcibly seizingland from white farmers for redistribution. Officially, the goal was to correct for thecountry’s unjust colonial past. In reality, the policy help him buy politicalsupport. The effects were devastating. The new farmers usually had little or no experienceand sometimes no interest in agriculture. From 2000 to 2009, total agricultural outputwas cut in half, with some farms producing only a tenth as much as before. By wiping out two of its largest crops: cornand tobacco, land reform both singlehandedly destroyed its economy and decimated its foodsupply. Meanwhile, many of its skilled farmers fledfor safety. As farms became less productive and demandfor the little food left rose, so did prices. And fast. Daily inflation reached 98% and Zimbabwe’seconomy totally collapsed. Shops,

if they were still open, increasedprices multiple times a day as 12 million people struggled to find food, water, andpower. Now, to slow inflation, a government mustdo two things: First, it has to stop printing money. Basic economics says increasing money in circulationsimply decreases its value. Second, and much harder is a government hasto convince people that its currency has value. Mugabe did neither. To fund its involvement in the Second CongoWar, the Reserve Bank kept printing new, higher denominations. But it just couldn’t keep up. The bank spent $500,000 US Dollars a weekordering new banknotes, which, by the time they arrived from Germany, were already worthless. Twice it redenominated – removing 10 zerosfrom all banknotes in 2008 and 12 in 2009 – but, to no avail. Zimbabweans didn’t believe their currencyhad value, and, therefore, it didn’t. In other words, prices kept rising largelybecause people expected them to. And soon, no more money was left. There just weren’t enough bills to go around. And that’s when Zimbabwe got creative. Like much of Africa, the vast majority ofits population is unbanked. In advanced economies, about 92% of peoplehave some kind of bank account, but that number is only 20% in sub-saharan Africa. Here, where the number of transactions arehigh but balances are low, branch locations and ATMs just aren’t very profitable – leavingZimbabwe with 6.5 ATMS per 100,000 people, Uganda with 4.2, and Niger with 1.7, comparedto the United States’ 174 or Macao’s 324. Zimbabweans lacked the infrastructure necessaryto keep money safe or transfer it between people. Not only does this hide the flow of money- granting cover to criminals and making it impossible for the government to regulateor tax it, but it’s also physically dangerous. Many who live in cities regularly send moneyto family members in the country, requiring they take a one or two day journey themselvesor hire someone to do it for them – and risk having it stolen.

But while this lack of banks would ordinarilyonly slow the continent’s technological progress, African entrepreneurs turned itinto an advantage. What it does have a lot of are phones. In many of it countries, total mobile phonepenetration stands at 80%. These two things allowed countries like Zimbabweto leapfrog over checks and credit cards, and then surpass more advanced economies inmobile payments. In places like the U.S., the ubiquity of banksand credit cards actually holds back new technologies. Tapping or texting would make sending moneymuch easier, but first, you and I need the same app. Hence why there are so many competitors – ChasePay, Google Pay, Square Wallet, PayPal, Apple Cash, Cash App, Zelle, and Venmo. The hard part isn’t building the app, it’shitting a critical mass of users. In Africa, the selling point was obvious:Either take a two day bus ride, or send a text. And because many of its countries are dominatedby a telecom monopoly – that company can ensure quick and universal adoption. In 2007, for example, Kenya’s largest mobilenetwork operator, Safaricom, launched M-PESA, ’m’ for mobile and ‘pesa’, meaningmoney. Each M-PESA user is associated with a SIMcard, allowing them to text anyone else money. There’s no charge to sign-up or deposit,and fees are minimal. But what’s truly revolutionary is that itdoesn’t require a bank account. To deposit or withdraw, you simply find anagent – over 100,000 middle-men who get paid to collect and then bring cash to banks, ortake out cash for when users withdraw or transfer money. It’s so convenient that it’s used foralmost everything – school fees, water, electricity, food, and so on. In Zimbabwe, the preferred app is called EcoCash,which in 2017, had 6.7 million users compared to its two million bank accounts. That year, the Reserve Bank reported digitalpayments accounted for 90% of its $97.5 billion dollars in total transactions, making itseconomy virtually cashless. Even digital currency, however, isn’t immuneto political incompetence. As a landlocked country, Zimbabwe relies onits powerful rivers for water and electricity. The Kariba dam alone provides over half ofthe nation’s electricity, making its frequent droughts extremely dangerous. In July, Econet generators failed to startafter a power outage, disabling its mobile payment platform, and, therefore effectively,the national economy.

Lifting a nation out of poverty is so difficultnot for a lack of resources but rather because solutions require deep, political changes. To rebuild its economy, Zimbabwe must firstmanage its inflation. To manage inflation, it has to build confidence. And to do that, its government requires reform. That hope came in 2017, when Mugabe was deposedafter nearly 4 decades of economic ruin. Fear promptly returned when this year Zimbabwereintroduced its Dollar and inflation again, began increasing. Yet, even while countries like Zimbabwe andKenya clearly still have plenty of unresolved challenges, they’re also model examplesof how those very same challenges are the necessary ingredients for innovation. Mobile money is, at best, a convenience formost of us. But for the world without bank accounts, it’slife-changing. By making transactions faster and more secure- apps like M-PESA literally increase the value of money. Theft is reduced, there’s less waiting inline or time spent delivering money, credit is more accessible to entrepreneurs, it increasessavings, and improves accountability. Africa is the world-leader in mobile moneyprecisely and only because it previously had so far to come. And as the youngest continent, on the receivingend of massive amounts of loans, its financial revolution is just the beginning. What’s genius about M-PESA is how it piggybackedon existing technology – phones were widespread, and SIM-cards and carriers were well establishedin Africa. Likewise, the expensive part of cell service- towers and equipment has already been built by big companies like T-Mobile and Sprint. Ting can help you save money by using thoseexact same .

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