Yet Zimbabwe did not build up a store of savings, even during 2009-2012, when the economy doubled in dollar terms to $12bn. The budget showed only one year of surplus, at just 0.7% of GDP in 2010, despite real growth of 10% annually for four years (inflation accounted for the faster rise in nominal GDP).
So Zimbabwe has entered the low commodity price era, with inadequate wage flexibility and virtually no government savings. As wages have remained too high, imports too have remained too high.
As a consequence, Zimbabwe keeps running a current account deficit and the supply of physical dollars in the economy has continued to shrink.
Where it gets complicated is when we consider the role of cash vs virtual money. Around the world, to the great distress of gold bugs, money is no longer backed by anything physical like gold.
Moreover, in the UK, physical money supply is a tiny proportion of the value of deposits in the banking system, let alone the value of all sterling-denominated assets in bonds and equities.
In theory, the Bank of England can however print notes to meet demand for physical money, but Zimbabwe cannot print US dollars.
Today, the billions of dollars that are theoretically in the Zimbabwean banking system cannot be turned into actual physical dollars, as the country has largely run out of dollars.
So when the government pays its workers, let’s say $400 for a month’s work, and wirelessly transfers that into the bank account of that worker, the worker is unable to convert the $400 into actual cash.
As a result, we now read reports that a cash dollar is worth more than a virtual dollar in the bank account.
It reminds us of the recent Greek and Cypriot crises, where capital controls meant that the value of euros in their bank accounts was (to an economist) worth less than the value of euros in bank accounts in France or Germany for example.
The crucial difference of course, is that the ECB was prepared to ferry euro notes and coins to these countries – it was the lender of last resort that Zimbabwe does not have.
The end result in Zimbabwe is few will want to put any physical cash they do have into the banks.
Meanwhile banks are left to buy the booming stock of domestic government debt. This has risen from $1.1bn in 2012 (9% of GDP) to $1.7bn in 2014 and $2.0bn (14% of GDP) in 2015.
By Charles Robertson of Renaissance Capital’s Global for The Source
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