Professor Steve Hanke’s inflation calculations sound like science fiction, but to business people in Zimbabwe they’re a real life risk nightmare. The Johns Hopkins professor notes that as bad as official statistics on inflation are, they’re mild in comparison to the truth.
The Zimbabwe government’s official inflation figure is a massive 231-million percent; but is substantially overstated according to Hanke. As of November 7th, the real figure is 516 Quintillion Percent. At independence in 1980, the Zimbabwe dollar was worth more than the US dollar.
Government restrictions allow only $50,000 Zimbabwe dollars per day to be withdrawn from bank accounts, enough to buy two bananas from street vendors. Zimbabwe police, to supplement their salaries, are reported to be targeting foreigners, and stopping people on their way to the airport to seal foreign currency, cellphones and any other valuables they may have. Zimbabwe police are notoriously vicious, as this picture shows from early 2008.
Government exchange rates for gold mining companies force them to sell gold at $0.06, or six US cents per ounce, when the international market rate is more than US$850 dollars per ounce, according to South African newspaper, Businessday. In Zimbabwe’s case, it appears that the ultimate mother of all risks to your business is the government.
Zimbabwe Risk Management
In response, shop owners have stopped accepting payment in Zimbabwe dollars, and only accept US dollars and South African Rands. While this makes life difficult for all but the most affluent customers, it keeps the shop keepers from loosing their shirts. Those who can survive must understand the dollar or rand exchange rates, and have the facilities (e.g. currency exchange) to continue to run their operations. Even so, the government charges a sales tax of 75% and doesn’t accept Zimbabwe currency to pay the tax itself. Because inflation is caused by central banks printing money, one Zimbabwean businessman was quoted by the UK’s Telegraph newspaper as, “The Reserve Bank is looting, that is what caused this end-of-game crash. The Zim dollar lost three zeros in a week. Now you can fly from Harare to Victoria Falls for US 20 cents.” The Zimbabwe Stock Exchange (ZSE) rises and falls by hundreds and thousands of percent daily, mostly from domestic savings trying to maintain value, as few foreigners care to brave Zimbabwe’s risks.
Zimbabwe business’ people who will be able to make it will have to possess unique capabilities – skills mixed with physical and technology assets to either generate wealth from other currencies (e.g. the internet); or as is traditional in Middle Eastern and Indian cultures, store gold or silver that retains its value no matter what funny money the central banks print. Other strategies for mitigating these sorts of currency risk would require Zimbabweans to have bank accounts in other countires, or incorporations and systematic currency conversion in other countries. But the physical assets aren’t sufficient. One still has to have the skill to know what the going rate is for these assets, and to effectively influence barters or convert a sufficient amount to fiat currencies, as needed to keep the enterprise running effectively.
Given the physical violence of Zimbabwe police and the likely increasing desparation from ordinary people, skill in self defense becomes an essential part of the operational risk management plan. Both physical security devices, but also martial art self defense skills can be useful. With the US Government Bailouts signalling an increased interest in US inflation, and devaluation of the dollar, what risk management strategies are you taking? Do you think it could ever get as bad as Zimbabwe is today in the US or Europe? Is this what the Chinese government fears as it attempts to ensure steady Chinese growth, for fear of loss of political stability that will inevitably overthrough Zimbabwe’s current regime? What human capital skills do you need to invest today to ensure your people can handle currency conversions, asset liquidations, and personal self defense? Do you, like The Scientific Leader, have a systematic strategy to mitigate these sorts of risks in a holistic way?