Zimbabwe is on the verge of economic catastrophe, with economists blaming the country's deteriorating economic situation on erratic monetary policies. The Reserve Bank of Zimbabwe and the Ministry of Finance have both flipped flopped on policy decisions.
President Emerson Mnangagwa recently said that banks would be prohibited from lending to the government and the private sector. The announcement caught many people off guard and rattled the market.
Zimbabwe's official inflation rate is 96 percent, but economists believe it is higher. According to Steve Hanke, an economist, the figure is around 256 percent. This is nearly twice the official rate.
Banks provide working capital for the majority of corporate Zimbabwe's operations. Most suppliers provide supermarkets with a 30-to 90-day credit period in which they can order products and pay for them later. The supply was thrown off by the lack of a line of credit. Companies began producing press releases a few days following the announcement, claiming that they had failed to honor pre-existing commitments. Some products began to vanish from supermarket shelves.
Sugar, cornmeal, and cooking oil have all vanished from store shelves. A precedent that harkens back to the dreadful year of 2008, when policy inconsistencies turned supermarkets into ghost villages. Zimbabweans recognize the indications of a failing economy and recall how difficult life was in 2008.
Effects on Farming
Farmers who were preparing for the winter wheat and sugar cane seasons were left stranded. Farmers, like everyone else in business, require credit for production. Some farmers were taken aback by the policy contradiction as they were finalizing their lending arrangements.
Knee-jerk Reaction by the Government
Finance Minister Mthuli Ncube and Reserve Bank Governor John Mangudya have been accused of being complicit in Zimbabwe's economic meltdown. Many of Zimbabwe's problems stem from policy inconsistencies and knee-jerk reactions.
The Reserve Bank of Zimbabwe believed that some companies were taking out cheap loans and buying hard currency on the black market. Because the ZWL is in free fall, they would be able to repay these loans at a lower interest rate. This was cited as the cause of soaring inflation in the country. The government had hoped to cut off the supply of cheap credit by prohibiting banks from lending.
This knee-jerk reaction, however, has been compared to shooting oneself in the foot. Instead, the Zimbabwean dollar has plummeted even more, causing products to disappear from store shelves, leaving customers worse off.
The Black Market
The black market has become a source of basic items since produce has vanished from the shelves. Consumers' favorite cooking oil and sugar can be found on the illegal market for double the price. The black market has been fueled by policy inconsistencies. Before the announcement, a combination of sugar and cooking oil cost $4.50 USD, but now costs $9. This agrees with Steven Hanke's figures, putting Zimbabwe on top of the global inflation leaderboard with a rate of 256 percent.
The government lifted the lending ban after seeing the results of their policy. A short press release was issued, unlike the president's declaration, which was made alongside his finance minister and the governor of the Reserve Bank of Zimbabwe.
The press release's tone was evocative of the disastrous choice to short-cut landing in the first place. The fact that this announcement didn't come sooner is surprising. However, the harm has already been done: inflation is on the rise, goods are scarce, and businesses are concerned.
Government critics are calling for the present forex auction system to be abolished. The method of forex allocation by the Reserve Bank of Zimbabwe lacks transparency. The method has also been cited as one of the causes of high inflation.
Ordinary Zimbabweans are the biggest losers in all of this. The teacher earning ZWL 20 000 has been priced out of basic necessities. The economy is being destroyed by severe shortages, policy inconsistencies, and inflation. To call the current situation a crisis would be an understatement. All have lost faith in the economy, and Zimbabweans should prepare for the difficult times ahead due to rampant inflation.