Siyabonga Hadebe & Luther-King Junior Zogli*
Saturday, 20 October 2018
Like a patient that has been terminally ill for a long time, it appears that the Zimbabwean economy has opted for euthanasia to end its pain and suffering. It appears that President Emmerson Mnangagwa's charm offensive to lure new investments since he took the helms of affairs isn't enough to prevent a collapse of the economy.
It is argued that former President Mugabe inherited a functioning and prosperous country at independence in 1980, with adequate infrastructure and incorruptible civil servants. The country was said to be hundreds of years ahead of most of Africa. Zimbabwe, a onetime powerhouse in the export of maize, cotton, beef and tobacco, now only exports its educated professionals, who are fleeing the harsh economic conditions in the country in droves.
The deteriorating nature of Zimbabwe’s economy cannot be overstated, as everything that can go wrong has gone wrong in the country. It is in arrears of nearly US $1.8 billion to its international development partners and World Bank figures show that as of 1960, Zimbabwe’s (gross domestic product) GDP per capita was higher than four of its Southern African counterparts.
The country’s GDP per capita was five times that of Botswana in 1960 but as of 2015, Botswana’s is seven times Zimbabwe’s as shown in the following figure:
Inequality is also very high in the country with a Gini coefficient of about 0.5 and the bottom 10% earning 3% of the country's income while the upper 10% earn 34%. It is therefore not surprising that about 21% of Zimbabweans live on below US $ 1.90 per day.
With the world’s third highest informal sector contribution to GDP (61%), majority of these poor Zimbabweans are in the country’s dominant agricultural sector which contributes about 67%, manufacturing 7% and services 25%. The overreliance on the fragile agricultural sector is a recipe for disaster as UN Zimbabwe report showed that the El Niño-induced drought which affected key crops in 2016, reduced maize production from 0.7 mt/ha to 0.6 mt/ha.
Late in 2017, Bloomberg observed that economic chaos "has been a regular feature of investing under former president Mugabe’s 37-year reign in Zimbabwe because he frequently blindsides markets with policies that have devastating consequences". When Mugabe was ousted in a 'soft coup' there was a positive mood all over that Zimbabwe would finally get out of the woods.
One of the notable policy decisions by the Reserve Bank of Zimbabwe (RBZ) to try and solve a crippling currency shortage, was to print a new form of money (bond notes) which resulted in an inflation rate of 500 billion percent in 2008, the highest inflation rate to have even been recorded. Consequently, the Central Statistics Offices in June 2008 declared that it "would no longer be releasing inflation figures."
Many Zimbabweans apparently resorted to buying equities as a refuge as the central bank printed hundreds of millions of its new so-called bond notes. “Instead of me having a fictitious bank balance, I would rather invest the money on the stock market,” said Walter Moyo, a 39-year-old shop manager in Harare who recently purchased shares in Delta, Econet and African Distillers.
Zimbabweans already knew that inflation would spiral and wanted to preserve their wealth and one of the main challenges is that, the true value of Zimbabwe's pseudo currency is unknown. However, many people use it in the informal economy to mop out US dollars from the formal system, reducing the amount of dollars available in circulation.
Visiting the bank to withdraw cash has not been an option for citizens because most lenders are short on US dollars. The greenback has been the main currency in use since Zimbabwe scrapped its own worthless dollar in 2009.
In the second half of 2017, it was reported that “there is a fear that Zimbabwe is returning to its previous days of excessive currency printing." This strategy was always going to end in a travesty one more time.
Although people had money in their bank accounts, they were only allowed to withdraw as little as US $50, US $150 or US $200 per week. Swiping to buy in shops is the option they are given, without limitations. They buy what they can electronically— appliances, cars, gold, property or, and for those with limited resources, shares. But the economy quickly stagnating to a cash economy because of cash shortages in the formal sector hence people resort to the greenbacks as a store of value.
Also, as bad money replaces good money, so are the dollars being stolen and replaced with bond notes. Most companies have been struggling to access the foreign currency to make foreign payments for raw materials making a number of them are sourcing the foreign currency on the black market. For example, manufacturers sell their products directly to the consumers because they cannot wait any longer for payments (that will never come) from retailers who often buy merchandise on credit. Streets at night are abuzz with trucks selling products to people.
Wholesalers engage in unofficial three-tier pricing regime. In this regard, retailers and other businesspeople are charging extra for payments made in bond notes or bank cards but less for US dollar cash transactions. The same item can have three different retail prices, costing US $80 when using cash, US $100 using bond notes and US $120 when one is uses a bank card. This form of pricing system will have an adverse effect on the poor majority as they may not have the means to buy their daily basic needs at three different prices.
Besides internal hoarding, it is reported that millions of US dollars illegally leave the country for neighbouring states. This situation emanates from the fact that Zimbabwe has been Southern Africa's only 'dollarised' economy. It thus makes it susceptible to currency exports because the US dollar is stronger and is preferred as a store of value. The US dollar is regarded as a foreign currency for non-dollarised economies in the SADC region, and beyond. Zimbabwe suddenly became a source of the US dollar, one of the world's strongest currencies, for the rest of Africa. As a result, Zimbabwe is prone to 'externalisation of the US dollar', which entails the conversion of Zimbabwe dollars into foreign currency without going through the RBZ.
Economist Tapiwa Mhute argues that, "an immediate and noticeable effect of dollarisation was price stability and reduced inflation". This may be true but, Zimbabwe was however enjoying borrowed economic stability because the country never had an official agreement with the United States Federal Reserve to use its currency. Political relations between Washington and Harare have been frosty for about two decades and it was quite surprising that Zimbabwe elected its foe's currency. Maybe it would have been better if the RBZ only pegged the local to the US dollar, and not adopted the greenback as a legal tender for day-to-day transactions.
The implication of using the dollar with no official agreement is that in the event of shortages of notes, the RBZ lacked options of either printing or submitting a request to the US Fed for more dollar notes. Without US dollars, it means that standard liquidity cannot be maintained in the economy. Among some serious misfortunes, Zimbabwe’s industrial production has remained subdued and with no substantial exports to inject much needed foreign currency into an ailing economy; the US dollar reserves in circulation started to dwindle.
Foreign investors like JPMorgan and Templeton, which sold some holdings before the currency crunch got really bad, are stuck watching the crisis unfold. They and other managers of African and frontier funds are invested in Zimbabwe because at US $11 billion, its market capitalization is bigger than Botswana, Ghana and Zambia combined. Companies like Delta and Econet are also doing well financially by catering to the country’s 14 million consumers.
In 2015, pulling money out of Zimbabwe was not as hard as the central bank made US $231 million available to pay investors abroad to repatriate cash, but that sum fell to US $ 5 million in 2016 and just US $700,000 in the first quarter of 2017.
Zimbabwe had an option of formally adopting a South African rand, for example, instead of the greenback as a solution and to stabilise the economy until it develops the required structures for a new currency. It looks like South Africa doesn't have a problem with offering assistance to its neighbour. South Africa’s foreign minister Lindiwe Sisulu recently remarked, "South Africa is always ready to help Zimbabwe, but they have to ask." With Zimbabwe adopting the Rand, certain modalities would have to be worked out to protect the integrity of the South African currency.
The rand, by the way is a de-facto currency for some countries in the Southern African Customs Union, which includes Botswana, Lesotho, Namibia, South Africa and eSwatini. Furthermore, the Common Monetary Area (CMA) links South Africa, Lesotho, Namibia and eSwatini into a single monetary union as the three countries have adopted the rand with some success.
Although these countries maintain their own currencies, these are all pegged to the rand. In the case of Botswana which is not part of the monetary union, it pegs its pula to a basket of currencies, with the rand given the greatest weighting.
A similar arrangement has been suggested within Zimbabwe in the past without success, signifying that the proposal being advanced in this piece is not new after all. But there is a need for Zimbabwean economic policymakers to act swiftly to stabilise the economy before being able to stand on their feet. If not, the tales of the country will be told in a similar fashion as Titanic. Some reasons given for not considering the rand were not completely rational as Zimbabwe’s former finance minister Tendai Biti claims Mugabe rejected proposals to adopt the rand, as he argued: "Why should we use another person’s currency"? A school of thought suggested the US dollar option made a lot of sense, not knowing it was a plot to nefariously amass wealth.
The reality however is that, Zimbabwe conducts more than 60% of all its trade with South Africa, according to the country’s Treasury, and three million of its citizens are estimated to live in the southern neighbour. Among others, the late Morgan Tsvangirai, Bankers Association of Zimbabwe, Confederation of Zimbabwe Industries and economist Ashok Chakvarati have also called for the adoption of the rand.
RBZ deputy governor, Kupukile Mlambo agrees, "It would make sense for us to use the rand as the main currency because we can benchmark prices - we trade almost nothing with the US, but we trade with South Africa so we can benchmark with them."
In its address to members of the Parliamentary Portfolio Committee on Finance and Economic Development, the Bankers Association of Zimbabwe reported that “In 2015, Zimbabwe lost US $1,8 billion to externalisation. It is further recommended the US dollar be reserved to make offshore payments and local electronic payments only.”
Basically, US dollars are disappearing from the country's banking system and have not found their way back into the economy, thus perpetuating an already dire liquidity crunch.
Zimbabwe’s Cambridge trained minister of finance Prof. Mthuli Ncube has proposed three options for the country to get out of the present economic problems; adopting the US dollar as the only currency, adopting the rand by negotiating to join the rand monetary area, or adopting a new Zimbabwean dollar.
As part of the stabilisation programme, Ncube further proposed a number fiscal policy reforms such as cutting public spending, parastatal reforms and tax hikes.
Zimbabwe's main opposition leader Nelson Chamisa who called Ncube "a good man who was joining a bad team," also suggested a new currency to be pegged to the South African rand during the build up to recently held elections.
During the opening of parliament in September 2018, President Mnangagwa appeared to contradict Ncube when he suggested that Zimbabwe will "continue with the use of the multicurrency system up until the current negative economic fundamentals have been addressed to give credence to the introduction of the local currency."
There is plenty of money in Zimbabwe - bond notes - but no one wants to use them. In the meantime, both President Mnangagwa and Prof. Ncube do not favour return of the decommissioned Zimbabwe dollar. They say the country will continue to use bond notes and the multiple currency system until the local economy stabilises.
A team of IMF economists are billed to have consultations in the later parts of 2018 to assess the country’s economic situation. In addition to help from the development partners, Prof. Ncube and his team have to make some sustainable but cruel choices NOW, to ensure the country’s fortunes take the right turn, just as the "Asian Tigers" went from low-technology, agricultural economies to industrialised and high-tech economies in a surprisingly short period of time. Clearly for Zimbabwe, there is a long way to go.
*About the authors:
Siyabonga Hadebe is an independent commentator on socio-economic, politics and global matters based in Pretoria.
Luther-King Junior Zogli, PhD, is an economics lecturer and researcher at the Durban University of Technology.