Iden Wetherell
The collapse of the Zimbabwe dollar and pressure from the International Monetary Fund (IMF) have forced President Robert Mugabe’s government to disclose how it intends to fund the substantial payouts it has promised veterans of the country’s liberation war.
But it is unlikely that this week’s announcement of far-reaching budgetary revisions and drastic measures to damp down market speculation will be sufficient to calm fears about Zimbabwe’s precarious fiscal condition.
Minister of Finance Herbert Murerwa disclosed this week that the government would raise Z$2-billion (R700-million) from the local money market and a further Z$2- billion by freezing existing Budget programmes and enhancing revenue collection to pay the veterans, who carried their noisy demands for state pensions to the gates of Mugabe’s Harare residence in August.
A growing shortage of foreign-exchange reserves, which saw import cover reduced to two-and-a-half months, led to a frenzy of panic dealing on what has been dubbed Black Friday a week ago. At one point the Zimbabwe dollar – at par with the British pound in the 1970s – fell to Z$45 against sterling – an effective 80% depreciation from the previous day. Against the United States dollar it fell to a record Z$26. The Reserve Bank hiked its key rediscount interest rate by three percentage points to 28,5% while also compelling corporate holders of foreign exchange to offload their accounts on to the local market.
Economists have said that the Reserve Bank’s move, which is sure to see commercial banks raise their lending rates, will prove damaging to business and impact particularly upon black entrepreneurs already struggling under debt burdens.
At the same time, mugging established companies of their forex is likely to undermine investor confidence – already fragile as concerns grow about an upwardly mobile Budget deficit currently at 10% of gross domestic product.
The reluctance of Zimbabwe’s rulers to rein in a pattern of promiscuous state expenditure has been at the centre of protracted negotiations with the IMF, which suspended balance-of-payments support to Zimbabwe over the spending issue in 1995. Aid was resumed this year but suspended again when Mugabe promised to pay the 70 000 war veterans Z$50000 each plus monthly pensions of Z$2000.
An IMF team left Harare on Tuesday expressing cautious optimism about steps taken to stabilise the deficit. But while opening the door to donor support, the IMF significantly did not promise any new money.
The perception remains among investors that economic policy is hostage to populist demagoguery. Mugabe is openly contemptuous of IMF strictures and declared in August that no country had ever gone bankrupt through borrowing. His government is a borrower of note and the decision to raise a further Z$2-billion from the market will squeeze out business if interest-rate hikes haven’t already done so.
The Confederation of Zimbabwe Industries’ chief economist Farai Zizhou said the move would be disastrous for companies. Other economists agree. Tony Hawkins, professor of business studies at the University of Zimbabwe, said the government’s measures would “push up interest rates, push up inflation and fuel the Budget deficit”.
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