For those of you who are unfamiliar with the economic situation in Zimbabwe…it’s bad. Over the past three decades, Zim has gone from one of the most promising countries on the continent, to one of the most pitied in the world. Here’s what I mean:
According to the OECD (Organization for Economic Cooperation and Development)…In the 1980s, Zim experienced 5.0% GDP growth per year. In the 1990s, they experienced 4.3% GDP growth per year. In 2003, they experienced a -18% GDP growth, meaning their GDP significantly declined compared to the previous year.
In 1998, Zim experienced a rate of inflation of 32% (nearly 20 times the U.S. rate of inflation for the same year). In December 2007, the Cato Institute estimated Zim’s rate of inflation was 215,000%. In July 2008 it was at a staggering 250,000,000%. Unfortunately, that’s not a typo.
Their rate of inflation was 250 MILLION percent. In real terms, this means that prices of goods (in Zimbabwean dollars) DOUBLED nearly every day. To compensate, a new 100 BILLION dollar note was introduced. Apparently that wasn’t enough, so they introduced a 100 TRILLION dollar note. As of January 2009 they removed 12 zeroes from their currency, meaning what was once worth Z$1,000,000,000,000 is now worth Z$1.
The reason this is relevant is because we have several entrepreneurs who are originally from Zim. The economic and political situations are so bad that millions of Zimbabweans decided to leave everything they had in order to immigrate to other countries in Southern Africa.
On the “up-side,” the problems in Zim created an interesting business opportunity. For crafty entrepreneurs, the turbulent currency in Zim, combined with a shortage of almost every type of desirable good, meant that exporting South African products to Zim could make for good business.
One of our entrepreneurs recently seized this opportunity by buying solar-powered batteries here in South Africa and then taking a bus into Zimbabwe to sell his batteries. When we asked the entrepreneur how much he was able to sell the batteries for, he replied that one battery was worth one goat. With such an unreliable currency, many people have reverted back to trading solely in goods (so they don’t have to worry about depreciation). We then asked approximately how much one goat was worth. He responded, “…well, it depends on how big the goat is.”
Very valid point.
In case you’re wondering, a goat can range in value from R150-R250 ($20-$32 USD).
An additional consequence of the troubles of the Zimbabwean dollar is that many people choose to use different, more reliable currencies. The most popular are: U.S. Dollar, South African Rand, and the Euro. Interestingly enough, at the Zim border $1 USD can be traded for 10 ZAR (South African Rand). The current market value of $1 USD is actually only approximately 7.5 ZAR. Consequently, it appears our entrepreneur may (unknowingly) be dabbling in a little currency arbitrage : )
