Zimbabwe allows foreign currency

With hyper-inflation running at unparalleled levels, the government of Zimbabwe has bowed to the inevitable and authorised the widespread use of foreign currency.

Following the launch of the ZD 100,000,000,000 note (which, like all recent issues, is not a true bank note and is an IOU with an expiry date) the situation has become untenable.

Simply Zimbabwe cannot print enough bank notes, and those it does print cannot keep pace, in terms of denomination, with the rampant inflation which, on some estimates, has now reached more than 3 million per cent and rising.

In December 2006, the country ran out of the paper it needed to print real bank notes - and due to sanctions, it could not buy more on the legal market. As inflation escalated, the official exchange rate to the USD rose - but the unofficial rate skyrocketed. There were rumours of government officials making millions of dollars by arbitrage between the two rates.

However, there may be more than a small amount of self-interest in the action by the Zimbabwe government. Wide ranging sanctions against members of the government, many government officials (including the head of the Financial Intelligence Unit, charged with identifying money laundering) and their families (see www.sanctionsinaction.com (part of www.BankingInsuranceSecurities.Com)) there is dramatically reduced opportunity for the bringing of most of the world's major currencies into Zimbabwe.

The results of this action are likely to cause considerable concern around the world - and not just for political reasons. Whilst humanitarian groups are likely to be very pleased if there can be some price stability in the country, leading to some relief from the desperate straits many of the people are in, there are lessons to be learned from Russia in the 1980s and 1990s.

In Russia, as confidence in the ruble fell, the new country turned into an unofficial dollarised economy. Although dealing in USD was illegal, the USD became the de facto currency in trade and even ordinary life.

An unwanted effect of this was that there was a rapid rise in the number of forged USD in circulation. Most of those forgeries were USD100 notes. When the US government announced, in the mid 1990s, that the number of forged USD100 notes in circulation around the world was causing concern, the then Russian Finance Minister was quoted in The New Yorker magazine as saying that, if the old notes were withdrawn, then the Russian economy would collapse. New notes were introduced but the old notes remained (as the US always does) in circulation.Even so, as we know, the Russian economy did in fact collapse, the IMF put large amounts of money in - which was promptly stolen by various officials - and further money was refused until the country put in place at least some vaguely useful governance and controls in 1998.

For Zimbabwe, the question is how long it takes for the USD (as the most likely parallel currency) to be adopted - and how long it will take for fakes to flood the market. The next question will be how acceptable those fakes will be in lieu of real currency.

At The Anti Money Laundering Network, we believe that the market is already awash with fakes and that the number will rise dramatically. They will continue in circulation throughout the country and acceptance, already high, will rise, too. With the reduction in need to go to banks to collect new notes, we expect that money in circulation will be outside not via the banks and that Zimbabwe will become, within a matter of days, an almost totally cash economy.

Because the notes will not go via the banks, the fakes will not be detected.

Therefore, as Zimbabweans try to move their USD notes out of Zimbabwe, the incidence of fakes into the global economy will increase.

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Nigel Morris-Cotterill heads The Anti Money Laundering Network, parent company of Vortex Centrum Limited, publisher of BankingInsuranceSecurities.Com.