/ 22 January 1999

The day the stock exchange stopped

Donna Block

The government of President Robert Mugabe has succeeded in doing what no one has done before: it has caused a strike by stockbrokers.

For three working days, from January 14 until January 19, Zimbabwe’s traders, dealers and brokers agreed not to accept orders or place bids. The Zimbabwe Stock Exchange, once one of the most promising in the world, ground to a halt.

What led to this extraordinary downing of tools was what brokers have described as a “hare-brained”, “ludicrous”and “monumentally stupid” tax on stock trades. The government’s intention to tax the gross value of all stock transactions was announced last October, but the finance ministry promised no action would be taken until the industry was consulted. However, the government implemented the tax last week without consultation, demanding that brokers collect the levy on trades going back to January 1.

The government’s first reaction to the strike was to ignore it. But by January 20 it had agreed to rescind the tax. Sudden U-turns like this have become the order of business in Zimbabwe. The modus operandi of the Mugabe regime appears to be: do the outrageous, see if it flies and if not, backtrack.

This pattern emerged when the government said it wouldn’t pay for the confiscation of 841 mostly white-owned farms and then said it would, then it wouldn’t, then it would. It raised taxes on basic goods, sparking riots last year, and then retracted them. It said it wouldn’t cover fraudulent bonds issued by a politically well-connected bank and then it did.

The questions on everyone’s lips in Harare these days are why is Mugabe is shooting himself in the crotch, and what other smooth moves might he have up his sleeves?

The answer in part to the first is that the government is desperate for cash. The effects of years of economic mismanagement, cronyism, spendthrift policies and a military entanglement in the Democratic Republic of Congo have taken their toll.

“There’s no money left in the kitty. They were desperate and had to do something, anything,” said JP Landman, an analyst with BOE Securities in Johannesburg.

The government was looking for a quick tax where there would be little chance of evasion and less of street protests. Last year, it successfully imposed a withholding tax on treasury bills. The knee-jerk reaction was to do the same on stock deals and call it a capital gains tax (although the tax was also payable on losses).

Investors were to pay a 5% tax on the value of the transaction to offset expected appreciation even if there was none, generating immediate cash for the government. In the end, it was a complete miscalculation.

But ideological agendas were also at play here, namely Mugabe’s contempt for capitalists. Zimbabwe lived in a socialist dream-world in the 1980s, but global changes forced the country to embrace a market economy in the early 1990s.

Mugabe’s disdain for capitalism came to the fore last month at a World Council of Churches meeting in Harare. Addressing a session on debt in the developing world, he said: “It is difficult to resist the temptation to conclude that perhaps the world would have been a lot better … if we had given communism both a spiritual and democratic God rather than accept rampant capitalism as godly. [The world following the fall of communism is] a heartless world dominated by bullies.”

So when he was looking for someone to squeeze, the obvious choice were those people who were the embodiment of capitalists: the foreign investors who account for 60% of the value of the stock exchange.

“They thought it would be easy to get money from those who make the money,” said John Makumbe, a political analyst at the University of Zimbabwe. “[But] this kind of behaviour winds up shrinking the economy. With unemployment levels at nearly 60%, this could be devastating.”

For now at least Mugabe has been forced to back off. Trading has started again, and brave investors are looking for bargains.

So what’s the next trick up the Zimbabwean government’s sleeve? Analysts say the next disaster will come when the government tries to fix the foreign exchange rate. The Zimbabwe Reserve Bank has already started to coerce the banks into dealing at specified rates. Should the government try to make this compulsory, disaster will beckon.

Then there’s the matter of a new 10% tax on all property transactions, which is interesting considering that Mugabe’s scandal-magnet wife, Grace, has her Harare mansion, allegedly built with state funds, on the market for Z$20- million.

“You never know what Mr Mugabe and company are going to do next. Just when you think they can’t do anything more outrageous, they go and find something else,” said one London-based Africa expert.