DEM SERIOUS INA ZIMBABWE

Street hawker Yvonne Chikotsa last visited a bank in 2008, near the zenith of Zimbabwe’s hyperinflation. She would wake each morning at dawn to beat long lines and withdraw more than one trillion Zimbabwean dollars, which was what a loaf of bread cost at the time.

“I still have mortal fear of banks,” said Ms. Chikotsa, who sells used clothing at a market in Harare’s impoverished Mbare district. She blames the Reserve Bank of Zimbabwe for allowing the runaway inflation that destroyed the value of her modest income. Now, she says: “My pillow is my bank.”

Zimbabwe’s economy is growing, in part because the government in 2009 discarded the country’s currency in favor of the U.S. dollar. The move tamed inflation and slowed a rush to the exits for investors. Yet deep-seated distrust of the government’s handling of money matters lingers among ordinary Zimbabweans, depriving banks of the deposits they need to drive a faster economic expansion that might ease some of the country’s tensions.

The uncertainty has turned Zimbabwe into a nation of hoarders. The grubby graying American dollars on Zimbabwe’s streets—including bountiful supplies of $2 bills, last printed by the U.S. Treasury in 2006—attest to a robust cash economy that largely bypasses the country’s banks. Deposits in Zimbabwe’s banks have recovered from $1.25 billion at the beginning of 2010 to some $3.3 billion since “dollarization,” but people hold more than that amount—or about $3.5 billion—outside of banks, according to the Bankers Association of Zimbabwe.

Zimbabwe’s cash-starved banks, and a central bank that has lost control of its currency, mirror challenges in other countries, including Greece, Malawi and Swaziland. But troubles at Zimbabwe’s central bank have reached a different level of dysfunction.

Over the past decade, the reserve bank lent $1.5 billion to President Robert Mugabe’s government for pet projects. The bank now owes $1.1 billion to a cast of regional development and central banks that it says it can’t repay because the government hasn’t reimbursed it.

Gideon Gono, who has led the reserve bank since 2003, is also battling allegations he has embezzled millions in central bank funds for personal use. Mr. Gono hasn’t publicly addressed the allegations, and in an email response to The Wall Street Journal, Mr. Gono declined to comment in detail. He said he would “respond to pressures” about the allegations “at the appropriate time.”

In the meantime, the bank can’t even serve as Zimbabwe’s lender of last resort. The government is in talks with the African Export-Import Bank to create a $100 million program to restart the lender-of-last-resort facility.

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Associated Press
Alex Vaviro runs his dirty U.S. dollars through a washing machine in Harare, Zimbabwe, in July 2010, in an effort to keep them fresh.

Short of that, if the central bank can’t step in to guarantee bank lending, liquidity will dry up, which is what has happened.

The string of troubles has left Zimbabwe’s financial system gasping, depriving businesses of capital at a time of sky-high unemployment. Zimbabwe officials estimate 90% of the country’s working-age population is unemployed.

After Zimbabwe abandoned its currency in favor of the greenback, the economy grew at an annual rate of 6% in 2009 and 9% in 2010. But growth dropped back to a rate of 6% last year and will fall to 3.1% this year, the International Monetary Fund predicts.

The crippled banking sector is contributing to the eroding growth rate, said Yvonne Mhango, Renaissance Capital’s economist for sub-Saharan Africa.

“Basically there is no monetary policy. I think they’re out of ideas,” Ms. Mhango said.

The banking troubles have dimmed an already bleak investment picture.

The country has untapped deposits of platinum and rich agricultural land. But few are willing to risk losing their investment to the “indigenization” agenda of President Mugabe, which aims to transfer farms and control of businesses and mines to blacks.

The Reserve Bank of Zimbabwe’s ideas for shoring up the financial sector have had a similar effect, economists say. In February, the central bank demanded that foreign banks, including Barclays BARC.LN +1.37% PLC and Standard Chartered STAN.LN 0.00% PLC, keep at least 70% of local deposits and assets in the country. Mr. Gono has promised meetings with banks and unspecified punishment for those that don’t comply.

A spokeswoman for Standard Chartered in Harare, Lillian Muchafara Hapanyengwi, said the bank always tries to comply with local laws. “All regulatory issues are given the highest attention,” Ms. Hapanyengwi wrote in an email. Barclays didn’t respond to requests for comment.

The demands have made banks hesitant to lend in Zimbabwe, hurting small domestic ventures that need capital to expand.

Tofara Kwenda, who earns $1,000 a month as a field officer for a democracy-advocacy group, applied last year for a $2,000 loan from Standard Chartered to open a candle-making business.

He says the bank never ruled on his application, even after a bank official called to scold him for complaining on his Facebook page about the slow process. Eventually, he got a loan from one of the many for-profit microfinance firms that have proliferated in Zimbabwe as traditional banks have pulled back.

“The banks are not grateful,” Mr. Kwenda said. “I am just using my bank account as a conduit to get my salary, which I immediately withdraw and keep at home.”

The distrust of banks is a problem for small domestic lenders that haven’t been able to rebuild deposit bases enough to expand their businesses, economists say. Many of Zimbabwe’s local banks have merged or sold majority stakes after struggling to meet capital requirements. The government is pushing for more consolidation.

Meanwhile, Zimbabweans are trying to get by without traditional loans and bank accounts.

Ms. Chikotsa, the 33-year-old clothing merchant in Harare, said she had never heard of Mr. Gono or Zimbabwe’s reserve bank until her small deposits started losing their value so rapidly.

“We were only taught to count to a thousand when we were in primary school, but that man, Gono, got us to know figures that we never thought existed,” Ms. Chikotsa said.

The government says it wants to compensate depositors for the money they lost. But three years have passed, and Ms. Chikotsa is still waiting.

Write to Patrick McGroarty at [email protected]