Preamble: the Zimbabwe cash crisis is now into its third decade. It began with the collapse of the Zimbabwe dollar in November 1997, after the Reserve Bank ran out of foreign reserves to prop up its value. This was followed by the hyperinflation of the Zimbabwe Dollar in the 2000s. After the Zimbabwe dollar was abandoned, there was a brief hiatus under the Government of National Unity – but the last three years have been a prolonged crisis of bond notes and cash shortages. 6 months after a political coup-non-coup, the problem of cash has settled back into the status quo. The question that Zimbabweans are asking is: how are we going to fix it? 

This post has three parts. The first section deals with diagnosing the root cause of the cash crisis – because the solution has to address the underlying contributing factors. The second part deals with the potential solutions. And in part 3, I’m going to talk specifically about the Chilean Unidad de Fomento option (which I think is a potential monetary model for Zimbabwe to consider).


In the hunt for reasons for the cash crisis, there are a whole range of culprits to point the finger at: Western sanctions, bad government policies, corruption, Bond notes, the use of the US dollar, the lack of use of the full basket of acceptable currencies, a lack of export competitiveness, and a host of other potential reasons. And the culprit of choice appears dependent on your political affiliation.

On Zwitter, the main political voices seem (to me) to fall into two camps:

Camp 1: the This Flag/Tajamuka movement supporters, who protested against bond notes, and (from what I can tell) blame the RBZ bond note policy for the cash crisis.

Camp 2: are convinced that President Mnangagwa has a plan to fix it, but can’t tell you exactly what it is. It mostly seems to involve Zimbabwe being open for business.

The trouble is: the Zimbabwe cash crisis is a culmination of a number of factors. Poor government policies are certainly part of the problem – but so is the US dollar itself.

But when it comes to the US dollar conversation – we Zimbabweans tend to be reluctant to turn on our former liberators. The adoption of the US dollar may once have freed us from the tyranny of hyperinflation (and the authorities that orchestrated it). But over the last five years, it has become its own kind of tyrant.

To illustrate this new version of economic tyranny, I want to hypothetically apply the policy to a different form of political geography. Instead of a country, let’s instead use a city. And I’d like to use Bulawayo:


Bulawayo is Zimbabwe’s second largest city, situated in the south-west of Zimbabwe.

And in this example, I want you to imagine that Bulawayo’s mayor has decided to secede from the monetary union of Zimbabwe, and ban the use of mobile money and electronic bank payments within the Bulawayo metropolitan area.

“Bulawayo bans the use of anything other than US dollar cash”

In this hypothetical example, the new monetary rules mean that:

  • All salaries in Bulawayo are payable in USD cash.
  • All Bulawayo-based supermarkets, vendors, factories and businesses are only able to accept payment in USD cash.

It sounds like a great idea, right?

But think about how this would actually play out in practice:

Question: if you lived in Bulawayo, and suddenly received your salary in cash, would you still do your big monthly grocery shop there?

Answer: probably not. USD cash trades at a premium of 50% to mobile money in the rest of Zimbabwe. So if you’re choosing between a grocery shop in downtown Bulawayo, or a quick visit to the nearby town of Gweru (where you can buy 50% more for your money) – you’d go to Gweru.

Question: if you were a supermarket in Bulawayo, would you buy your products from a Bulawayo manufacturer?

Answer: also probably not. As above, USD cash trades at a premium of 50% to mobile money in the rest of Zimbabwe. So if you’re choosing between a manufacturer in Bulawayo, or one in Harare (where you can source similar products at lower cost) – you use the Harare-based manufacturer.

Question: if you were a Bulawayo-based business, would you be able to survive?

Answer: your customers are flocking to buy their products from outside Bulawayo, so you’re in for some tough times.

The trouble is that the adoption of USD cash in this small geographic location would be economically destructive. Mainly because the area can’t be an ‘island’ with no contact with the outside world.

Undoubtedly, Bulawayo would attempt to set up trade borders, and impose high tariffs on goods entering the metropolitan area in order to protect local business. But this would also encourage smuggling and profiteering – because borders become very porous with the right incentives.

And it would end in one of three ways:

  1. Bulawayo becomes a ghost town, where much of its economic activity (and labour force) has moved elsewhere, and only very basic and essential activity remains;
  2. Bulawayo’s economic activity moves underground, where people use illegal currency swaps and black market sales to circumvent the official USD cash regime; or
  3. A combination of outcomes 1 and 2, where some economic activity moves elsewhere, and what is left is mostly underground.

Making the cash regime a not-really-great solution for Bulawayo, as it turns out.

So why is it good for Zimbabwe then?

After all, the only real difference between a metropolitan area and a nation state is size (and sometimes, not even that – the metropolitan area of Bulawayo is larger than Bahrain, Singapore and Lichtenstein).

So it’s probably not a great solution for Zimbabwe either.

Gold Standards, Fixed Exchange Rate Regimes, and Monetary Unions

When Zimbabwe dollarised in 2009, it essentially pegged its internal currency to the US dollar. It ‘redenominated’ everything into US dollars, including the banking system. And the Reserve Bank was no longer involved in the foreign reserve system. Instead, the local banks did it themselves, through their correspondent banks in New York.

But we have many historical examples of economies that have tried to fix their currencies at a particular value, or to a particular currency. Those ‘fixes’ have had various forms – but all of those forms resulted in poor economic outcomes when the underlying economics of the original ‘fix’ had changed.

This is the key point that I want to make here: these fixed monetary values might work at first, because the value is in line with the economic conditions that existed at the time that the currency regime was put in place. But if those economic conditions change, the inflexibility of the currency regime becomes problematic.

And to be clear – it’s not just the economic conditions in the country with the fixed exchange rate that can change. External changes can also make the fixed exchange rate inappropriate.

So let me give you some historical examples.

The Gold Standard in Britain

Prior to World War I, the British pound had a fixed exchange rate to Gold (ie. the price of Gold was fixed in pound sterling terms by the Treasury/Chancellory/whomever).

During World War I, most countries suspended their Gold Standards – as did the British Empire. Britain engaged in inflationary money printing, and by the time the war was over, the price level in Britain had doubled.

Once the war was over, the Brits tried to restore the Gold Standard at its pre-war price level. Only, their economy had fundamentally changed: many of their pre-war industries had been diverted into wartime production during the war; an entire generation of young men from the labour force had been lost; and there were far more bank notes floating about than before the war had begun.

The British economy was fundamentally changed, and the old gold price was no longer applicable.

So when Winston Churchill (yes, him), as Chancellor of the Exchequer, returned Britain to the Gold Standard at pre-war parity in 1925, what followed was depression, unemployment and a series of strikes.

Speculators noticed – and a series of speculative attacks on the pound drove Britain off the Gold Standard by 1931.

Churchill apparently considered the pre-war Gold parity decision as the greatest mistake of his life.

The main point: changes in the British economy made the original Pound-Gold exchange rate completely inappropriate – and drove the country into recession.

Fixed Exchange Rates – breaking the pound

I realise that I’m using Britain again – but the story of George Soros and the breaking of the pound is well known.

Britain entered the European Exchange Rate Mechanism (ERM) in 1990, where it committed to maintaining an exchange rate of 2.95 German Deutsche marks to the British pound sterling (with a permitted 6% movement in either direction).

Two years later, the German Bundesbank was following a policy of high interest rates in order to limit inflation in Germany after the reunification of East and West Germany. Meanwhile, the UK was experiencing much higher inflation.

The UK had fallen into recession, as German imports were becoming increasingly cheaper due to the discrepancy between the inflation rates. Meanwhile, the Bank of England was using up its foreign reserves in order to maintain the currency peg.

Then, on Black Wednesday in 1992, George Soros took a bet that the Bank of England was going to run out of foreign reserves. He amassed a stockpile of pounds and went to the Bank of England to exchange them for Deutsche marks. The Bank of England handed him their reserves, realised that they were not able to sell their reserves fast enough to keep up the exchange rate, and then they “broke” the pound by abandoning the ERM exchange rate.

The main point: changes in both the British economy and the German economy made the original Pound-Deutsche mark exchange rate completely inappropriate – and drove the country into recession.

Greece and the Euro

The Greek economy has always been weaker than some of the northern members of the Eurozone. When it joined the Euro in 2001, it converted the Greek drachma at a set exchange rate – and then abandoned the drachma.

The economic differences between Greece and the rest of the Eurozone were papered over by debt for the first few years – but by 2009, the scale of the economic differences were brought to light by the Global Financial Crisis.

Crippled by the strength of the Euro, Greece had no choice but to face the long, hard road of internally-devaluing itself. Austerity and depression have followed since, alongside capital controls and a constant string of new governments.

Greece has survived within the Eurozone only because of the bailouts that it has received.

And many Greeks would argue that the bailouts are only prolonging the inevitable: that the Greek economy is too different from the Eurozone at large, and without some form of Eurozone-wide fiscal support program, Greece would be better off with the drachma.

The main point: the growing gap between the Greek economy and the rest of the Eurozone made the original Euro-Drachma exchange rate completely inappropriate – and drove the country into recession.

Those are only three examples. But history is full of these types of failures.

Whatever the politics, the historical lesson seems clear: that weak economies pay heavy penalties for maintaining a strong currency. The lack of an exchange rate mechanism forces the economy to devalue internally in times of economic difficulty (through recession, austerity, wage cuts and unemployment). And if that fails, or happens too slowly, the exchange rate can tear itself apart, creating parallel exchange rates.

Which is what has happened in the Zimbabwe economy.

The Path to Zollarisation

When Zimbabwe adopted the US dollar as its primary currency in 2009, it was great for business. Quantitative Easing was happening in the US, so a ready supply of cheap dollars were flowing into emerging markets.

But in 2013, the QE tap was turned off, and that flow of money reversed course. Emerging market currencies, like the South Africa Rand, crashed. And Zimbabwe was left holding on to a strengthening Dollar, while her neighbours were dramatically devaluing.

Domestic industry could not compete with the (now much) cheaper imports from South Africa and elsewhere. And this increased demand for imports, alongside a drop in export competitiveness, caused a Balance of Payments crisis.

In a normal economy, this would result in a devaluation of the local currency. But because Zimbabwe’s local currency is a foreign currency, Zimbabwe plunged into a cash crisis*. Which arguably led to the political non-coup that removed President Mugabe from power.
*for a more detailed explanation of this series of events, here is an older post: The Path To Zollarisation.

The main point: economic conditions within Zimbabwe, and within the Sub-Saharan area, and in the world in general, are significantly different to where they were in 2009. And so our initial internal-pricing from 2009 is now out of sync – and we either need to internally devalue ourselves, or abandon this monetary regime.

Where Zimbabwe stands today

At this point, the Zimbabwean economy has split:

  • Most transactions take place in Ecocash (mobile money) and RTGS (electronic bank money); while
  • More significant transactions take place in foreign cash, nostro money (foreign bank reserves) or offshore transfers.

The parallel exchange rate between those two types of “US dollar” are loosely set by a non-transparent underground market.

And for the last two years, Zimbabwe has effectively been undertaking a process of internal devaluation, whereby local transactions are being ‘repriced’ into cheaper electronic money.

But because this process is being created by market forces that are forced to operate outside the official legal system, it has been open to exploitation and corruption.

This is highly inefficient:

  • Importers (including manufacturers that import raw materials) are forced to source foreign currency through rent-seeking intermediaries at a premium;
  • Exporters are forced to repatriate their proceeds at a much lower premium (this is the ‘export incentive’ of around 5%, given by the Reserve Bank of Zimbabwe) in terms of exchange control; and
  • The real business of the economy is being subverted into a host of survival-esque activities (such as cash sourcing, etc), that drain true productivity – which, in turn, exacerbates the regional competitiveness issue.

So the important question is: how does it get fixed?


The options here are actually quite clear:

Option 1: abandon the fixed exchange rate regime altogether

That is: bring back the Zimbabwe dollar.

Option 2: create a new fixed exchange rate regime

That is: adopt the South African Rand, or something more exotic.

Option 3: try to recreate the original economic conditions (or some alternative version of the economy that matches the exchange rate)

That is: attempt to replicate what the Eurozone is attempting to do with Greece. It seems to involve bailouts and stimulus packages to try and bring economic growth in line with the external value of the currency that they’re using.

In practice, there are some obstacles:

  • The return of the Zimbabwe dollar would almost certainly be the quick fix solution. In my mind, if done correctly, it may also be the best long-term solution. But given the history, it would be highly unpopular.
  • The adoption of a new fixed exchange rate regime is probably the least disruptive option. But South Africa is in a bit of a tenuous political situation itself – and Zimbabwe does not want to get dragged into a recession because South African populists want to repeat an experiment that Zimbabwe has already tried.
  • Fixing a failing economy is difficult enough as it is – trying to do it with an artificially strong currency is the kind of thing that you would only consider attempting if you had the backing of the largest economy in the world. And it’s definitely not clear yet whether Greece’s economic story will end well.
Is Zimbabwe trying any of those?

Well, it’s not clear. But it looks as though the new ZANU-PF is trying Option 3 first. All the slogans for President Mnangagwa’s electoral campaign involve Zimbabwe being open for business – and specifically, foreign business.

The game plan appears to be some version of:

Step 1: stop the profiteering and speculation in the underground market

By targeting the individuals who were using the parallel exchange rate market to ‘externalise’ funds (as opposed to those using it to keep their businesses going), there should be some stabilising of the parallel exchange rate. Which does seem to have happened, actually. The parallel rate seems to have been relatively stable since November 2017.

Step 2: try to get more foreign investment

The inflow of foreign funds would replenish the foreign reserves, and permit some kind of recovery of the parallel exchange rate.

Measures already taken here include the alteration of the Indigenisation Law (which snuck through a Finance Amendment Bill in March), and various Davos-style visits to the rest of the world.

Step 3: incentivise exporters

Exporting companies generate foreign reserves – and there are certainly attempts to try and prioritise those businesses wherever possible. Or, at least, there are noises in that direction.

Step 4: get foreign aid and/or loans

The Zimbabwean bail-out – the general understanding is that there need to be elections first to legitimise the new dispensation, and then the money will flow.

And perhaps that will work.

But my guess is that there is also a Step 5 that we haven’t heard about yet: something that involves a longer term monetary solution.

I’m not sure what long-term monetary solution ZANU-PF has in mind.

But we need one, so I’d like to offer a suggestion. And to do that, let me introduce you to Chile’s “Unidad de Fomento”.


Zimbabwe is not the first country to deal with untrustworthy monetary authorities. Many Latin America countries had large amounts of inflation (and hyperinflation) in the 1970s. Some of them dollarised. Some of them pegged their currencies to the US dollar. But Chile began to use the Unidad de Fomento, their own anti-inflationary solution, in a more widespread way.

But before I explain what the Unidad de Fomento is, we need to reflect on what Zimbabweans have learned about the nature of money.

The definition, and devolution, of money

Something is traditionally considered “money” when it is:

  • A medium of exchange (ie. people use it to pay for things);
  • A store of value (ie. it has enough value that people can use it over time); and
  • A unit of account (ie. it is used in prices and contracts, as a measurement of value).

I drew a diagram:

Blank Diagram

But hyperinflation has a way of pulling that definition of money apart.

In Zimbabwe, when people noticed that inflation was starting to spike, they realised that the ‘store of value’ is actually a question of time. Money only really needs to hold its value for the time it takes for you to receive your salary and then spend it. So we can actually split some of that definition:

Money Definition and devolution

Because when your money is no longer a long term store of value, you find alternatives:

Money Definition and zimbabwe devolution

But then people also realised that there is a contractual problem. If you agree to sell someone an asset (like a house) at a certain price, you can’t do it in a depreciating currency unless you want to lose money on the deal. So people stopped quoting in Zimbabwe dollars – they started quoting in US dollars. You could still pay in Zimbabwe dollars – but it would be settled at the rate on the day of payment.

So we changed our unit of account:

Money Definition and zimbabwe devolution-2

The final quality to go was the “medium of exchange”, when you were no longer able to hold the Zimbabwe dollar for long enough to be able to spend it.

Money Definition and zimbabwe devolution-4

At which point, the Zimbabwe dollar was no longer money.

But we also learned that we can actually split money into different functions. It is perfectly possible to have one form of money that is a store of value, another that is a medium of exchange, and a third that is a unit of account.

So what is the Unidad de Fomento?

The Unidad de Fomento (UF) is a unit-of-account currency in Chile. Chile also has the peso, which is the medium-of-exchange currency. But there are certain kinds of transactions and contracts that are designated in UF.

The important thing about the Unidad de Fomento is that the exchange rate between the peso and the UF is set daily, in reference to inflation. That is: the UF represents a constant real value of money.

Here’s how it would work:

  • Let’s say that the exchange rate today is 2 pesos to the UF.
  • I offer to rent my apartment for 3,000 UF per month, with one month’s deposit payable upfront.
  • My tenant agrees to it. And he pays me a deposit of 6,000 pesos straightaway (3,000 UF, at an exchange rate of 2 pesos to the UF).
  • Then, say, the Chilean central bank adopts an expansionary monetary policy, and inflation causes the exchange rate by the end of the month to reach 3 pesos to the UF.
  • My tenant then has to pay me 9,000 pesos in rent.
And how does it control inflation?

Here’s a quote from this great blog post on the UF:

While many Chilean prices are expressed in terms of the peso, or P, a broad range of prices are expressed in an entirely different unit, the Unidad de Fomento, or UF. Real estate, rent, mortgages, car loans, long term government securities, taxes, pension payments, and alimony are all priced using UF.

The important ones here are “mortgages, car loans, long term government securities and alimony”.

What people tend to forget is that credit plays a large part in driving hyperinflations. If you can borrow money in a depreciating currency, then it pays you to do it – and borrowers become invested in the hyperinflation continuing.

But if you designate the loans in a non-inflationary currency, then people cannot borrow to speculate. This prevents a government from trying to inflate away its own debts – and it prevents private sector borrowers from benefiting from the inflation.

In some ways – the UF achieves something similar to dollarisation. It anchors credit.

But why would it be better than dollarisation?

Let’s assume that Zimbabwe did something like this with their monetary system, where RTGS/Ecocash became some new version of Zimbabwe Dollar:

Money Definition and zimbabwe devolution-5

How this would help:

  1. Our anti-inflationary currency unit would no longer be entirely dependent on external conditions and foreign reserves. Instead, it would be based on Zimbabwe’s inflation rate alone. It would also not be a tradeable currency – in which people could speculate. It would simply be a unit of measurement – but a unit of measurement that would shelter the Zimbabwean economy from the potential return of hyperinflation.
  2. This anti-inflation measure would free up the newly fledged Zimbabwe dollar to float freely in the foreign exchange market, which would address some of our regional competitiveness Balance of Payments crisis.
  3. The US dollar could still act as a store of value, by continuing to be a legal form of currency. And we might actually have access to it, if the official exchange rate were free-floating.
  4. And the Zimbabwe government could again re-enter world credit markets, with bonds denominated in a non-inflationary currency unit.
So who would set the Zimbabwe UF value?

In Chile, the measurement of the CPI that reprices the Chilean UF is done by a bureau of statistics.

If the Zimbabwean government was truly committed to this kind of initiative, then perhaps we could start with an outsourcing of the inflation measurements to an independent agency – under IMF and World Bank oversight, or something along those lines.

Is this really the solution?

Well, it seemed to work in Chile, so it’s something that we should consider.

But my main worry here is not the solution – it’s that we don’t seem to be talking about a monetary solution at all. In fact, I don’t even know if we’re admitting that our monetary system is an issue.

It seems to me that many of us believe that the US dollar would work just fine ‘if only’ we had a different government. I am not sure that’s true.

But either way, we can almost certainly do better for ourselves than this US dollar regime that we’ve had for nearly a decade.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at Also, check out the RA podcast on iTunes: The Story of Money.