The recent economic history of Zimbabwe demonstrates that a crisis can drag on for decades without a turnaround. For much of the past 25 years, the country has faced an economic and humanitarian crisis.
With the drastic measures brought in last week to restrict the use of mobile payment platforms and halt trade on the Zimbabwe Stock Exchange, the signs are that the Harare government is desperate. It wants to prop up the official exchange rate to restore public confidence. It is also a sign that the banking system is under strain, as it is unable to meet cash demands of depositors. Above all, it is a sign that the economy has turned from bad to worse.
The entire Zimbabwe economic story should be an object lesson to those in South Africa intent on radical economic transformation through expropriation without compensation, unaffordable government spending, and ending the independence of the Reserve Bank. No claim to exceptional status from basic laws of economics can be made. Like the laws of physics, there are certain principles of economics that are established.
Economic activity in Zimbabwe trended downwards from the 1980s, but plummeted with the seizure of commercial farms after 2000. Half the population relies on food aid, and the country is experiencing its second bout of hyperinflation, which is now approaching 800 percent. The savings and pensions of many have been wiped out by inflation as well as by the theft by conversion of foreign currency-denominated government debt into local currency at a depreciated exchange rate. Economist John Robertson says that as a result of Zanu-PF policy choices, ‘there are fewer people in formal employment than in 1980, when the population was half its current size’.
Last week’s events were the latest turn in Zimbabwe’s continuing crisis that began with the accelerated economic decline in the late 1990s. President Robert Mugabe’s massive pay-out to war veterans in the 1990s resulted in a ballooning of the government budget deficit. Then, in 2000, the Mugabe government started seizing commercial farms and abandoned what might have been an orderly land reform programme. The flight by investors resulted in an economic implosion. There has been a slide with recurring crises ever since.
Policy own goals
Zanu-PF hardliners blame European Union and US sanctions for their problems, but these only target a narrow elite. The weather has played a role in the country’s problems, but neighbouring Botswana and Zambia have done far better. The decline is overwhelmingly due to policy own goals.
In recent months there have been critical shortages of foreign exchange, fuel, and cash. That is largely due to the erosion of the country’s productive capacity and the monetisation of the government’s deficits. This has placed the Zimbabwe dollar under pressure and severely damaged government credibility.
On Friday last week, the government resorted to the ban on mobile payment platforms and stock exchange trading. A day later it backtracked on the complete ban of mobile platforms, which would have meant that the country’s payment system would have ground almost to a halt. The inability to freely access cash balances in banks means that 85 percent of Zimbabweans now use the mobile platforms for transactions. The ban on foreign exchange trading remains in place to deal with what a government statement called ‘malpractices, criminality, and economic sabotage’.
Without the mobile platforms, ordinary Zimbabweans cannot access foreign exchange, which is often used for local transactions, as well as domestic currency. The reasons for the ban on stock exchange trading might be to restrict the public gaining market information on exchange rates, as some stocks price off those that also trade in South Africa. It might also be to force people to use the banks to make deposits. Those with sufficient wealth prefer to keep their assets in stocks rather than in local cash deposits, which are quickly eroded by inflation. It can also be difficult to access deposits and almost impossible to use foreign currency accounts run by the Zimbabwean banks.
Sharp depreciation
The continuing monetisation of the deficit and rising inflation have forced a sharp depreciation in the exchange rate. A new currency, the ZWL$, traded at 3.5 to the US dollar on the black market when it was introduced in February last year. At the end of January this year. it was at 25 ZWL$ to the US$. Under last week’s order, the Marketwatch.zw website is barred from showing this rate, but it is estimated by some Zimbabweans to be in the range of 80 to 90 ZWL$ to the US dollar. What all this shows is that the launch of the new currency was a failure.
The banning of the platforms and Marketwatch.co.zw from showing a parallel exchange rate has made price transparency difficult for consumers and has surely impeded the functioning of the economy. Last week the official rate that emerged from the weekly Reserve Bank of Zimbabwe foreign exchange auction was 57.35 ZWL$ to the US dollar. But the auction lacks transparency, as government, the largest user of foreign exchange, receives its allocation outside this mechanism. In addition to the black market official auction rates, there is a rate based on the price of Old Mutual shares, which trade in Harare and Johannesburg, and is well above that of other rates.
The most accurate price signal came from the black market rate, but it is one that the government does not want revealed, as the premium over the official rate shows the cost of its restrictions and policy incompetence.
‘You can rig an election, but not the black market,’ says Tendai Biti, the second Vice President of the main opposition party, the Movement for Democratic Change (MDC). Biti, who was Minister of Finance in a coalition government established by the MDC and Zanu-PF in 2009, says the only option for currency stability is now to adopt the US dollar. That was the way hyperinflation was ended when he was in office.
‘There will be a military coup or people are going onto the streets. I can guarantee that there will be an implosion,’ says Biti.
There are signs of growing dissatisfaction in the military with President Emmerson Mnangagwa, the man they put in power to replace President Mugabe in late 2017. When Mnangagwa came to power there were hopes of reform, but in the end he has proved little different from Mugabe. Three weeks ago the government was forced to deny rumours suggesting an imminent military coup.
Rule of law
But David Coltart, a veteran opposition politician, points out that replacing Mnangagwa with a Zanu-PF stalwart without a return to the rule of law will do nothing to restore confidence in the Reserve Bank of Zimbabwe.
What the Zimbabwe economic implosion illustrates is that once property rights are infringed by a government, public distrust sets in, local and foreign investors flee, and economic decline becomes entrenched.
In order to keep government going and dole out patronage to supporters, the government has to force the central bank into monetizing its deficit. That pushes the exchange rate off a cliff and fuels hyperinflation. Public confidence is lost, and to stay in power in the face of a continuing economic contraction the government must become increasingly authoritarian.
This has been the recurring theme in Zimbabwe over the past 25 years. Despite the deep crisis, there has not been economic reform or a change in government.
The story presents an object lesson on economic catastrophe.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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