Zim’s house of cards is teetering

Informal currency traders do a roaring trade in Harare, where they take advantage of the demand for dollars by buying up bond notes at a massively discounted rate. (Jekesai Njikizana/AFP)

Informal currency traders do a roaring trade in Harare, where they take advantage of the demand for dollars by buying up bond notes at a massively discounted rate. (Jekesai Njikizana/AFP)

COMMENT

If you are worried that South Africa’s economy is going down the plughole, there’s nothing like a few weeks in Zimbabwe to boost one’s spirits.

South Africa’s official unemployment rate is a mere 27%; Zimbabwe’s is estimated to be about 90%. South Africa’s inflation rate is about 5%; Zimbabwe’s is reckoned to be about 250% (although nobody really knows).
The South African rand is about 14 to the United States dollar; Zimbabwe … well, it uses US dollars, but it’s only the lucky few who can lay their hands on any of them.

But the shops in Harare are full, there’s petrol at the local garage and, during a Sunday lunchtime, the restaurants in Borrowdale (the most expensive suburb in Harare) are packed. So, what’s going on?

Let’s go back to 2008. Zanu-PF’s profligacy had been fuelled by the printing of money and runaway inflation. Mega-inflation meant that ordinary people lost their pensions and whatever savings they had, as the Zimbabwe dollar lost its value and people resorted to bartering or the use of other currencies.

Ultimately, the government faced no choice but to accept reality. It scrapped the Zimbabwe dollar in favour of a basket of other currencies although, within a short time, this meant in effect the reign of the US dollar.

The adoption of the dollar as the principal medium of exchange stabilised the economy remarkably quickly. Subsequently, Zanu-PF ruled in coalition with the Movement for Democratic Change (MDC) for the five years after 2008.

With the MDC heading the department of finance, economic policies became more rational and the economy recorded high rates of growth, albeit off a low base. However, having in effect lost the last election in 2008, Zanu-PF made sure it did not make the same mistake again and, in 2013, its control over the electoral machinery ensured that it swept back to power.

Within a short time, it returned to its familiar policy mix of profligacy, corruption and populist economics. Unsurprisingly, the supply of money began to dry up.

Zanu-PF faced major problems. Above all, dollarisation meant that the cost of Zimbabwe’s exports on international markets was high. Worse, the dramatic collapse in agricultural production since the early 2000s (following the appropriation of white-owned farms) and the decimation of the country’s manufacturing industries meant that there was relatively little to export anyway.

Meanwhile, the government’s insistence that mines should be 51% Zimbabwean-owned has done nothing to entice inward investment or boost exports during an era when most commodity prices have fallen.

In short, the capacity of the economy to earn US dollars by selling goods externally has fallen dramatically, and the supply of money circulating in the country has dried up.

Faced with a looming crisis, the Zanu-PF government has resorted to three key strategies.

One has been the issue of “bond notes” by the Reserve Bank of Zimbabwe. Officially, these are designed to swell the amount of money in circulation within the country. The problem is, because they are issued by a government that presided over hyper-inflation, nobody trusts them.

But, however reluctant people are to use bond notes, they are sometimes forced to accept them because of the sheer shortage of “real” money. Accordingly, when they can, they rush off to the local bus station where they can sell them for dollars to currency traders, albeit illegally, at a huge discount.

The second strategy has been the rapid expansion of the real-time gross settlement system, or electronic money, for everyday trading.

Because the government wants to hoard its scarce supply of dollars, it now pays its employees very largely in electronic form. This en-ables employees to pay their bills in the supermarket, or wherever, electronically but they are rarely able to convert the notional sums of dollars they hold in the bank into real cash (unless, of course, they trek down to the bus station).

Nor are they able to spend these dollars outside the country, unless they gain special permission from the Reserve Bank.

Meanwhile, with the rate of inflation again increasing and the widespread lack of faith in the banks, people spend their bank balances on consumer goods as quickly as possible. If times get hard, you won’t be able to get rid of your bond notes but you may be able to sell your fridge.

But it’s the third strategy the government has pursued that is really fuelling Zimbabwe’s Alice in Wonderland financial system. Since 2013, government expenditure has steadily increased every year, despite the country earning very little internationally.

The Zanu-PF government may have hoped to fund this by its old trick of literally printing money — that is, by expanding the supply of bond notes. However, such was the negative popular sentiment, with ordinary people fearing that bond notes were a cover for the reintroduction of the Zimbabwean dollar, that the Reserve Bank seems to have restricted their issue.

What the government has done instead is to fund its rising costs by issuing treasury bills. No one in their right mind would want to buy them but, with things as they are, the banks have little option but to do so. As inward investment into Zimbabwe has dried up to a trickle, there is little else for them to spend their money on, and the interest rates the government promises to pay are, at face value, attractively high. Anyway, they are also placed under considerable political pressure to lend to the government, even though the banking sector is very much aware that it may never get its money back.

Whereas the coalition government recorded budget surpluses for three of the four full years during which the opposition controlled the treasury, the Zanu-PF government recorded deficits of $186‑million and $125‑million in 2014 and 2015. Recently, then finance minister Patrick Chinamasa projected a deficit of $1.41‑billion for 2017. As of June 30 this year, $2.5‑billion worth of treasury bills were on issue.

To put it another way, the government is bust; it is again printing money to cover its spiralling costs and inflation is rising. On the other hand, there is an election looming in 2018, so Zanu-PF does not want to cut back. Far from it, it wants to carry on spending, as fast as it can.

Zimbabwe’s financial system increasingly resembles a house of cards. Were one card to give way (for instance, if Eskom had the temerity to suggest that Zimbabwe should pay for the electricity the power utility is supplying), the entire edifice would collapse.

Mugabe’s response has been to replace Chinamasa, who has been warning of the structure’s fragility in ever more urgent tones, with Ignatius Chombo, a party loyalist who will brook no talk of any need for structural reform.

In other words, the spending will continue. Zimbabwe’s financial system is living on borrowed time and borrowed money.

It will again end in financial ruin, as it did in 2008. But all Zanu-PF cares about is ensuring that it wins the next election and allowing its political elite to “eat”. How people survive amid this financial absurdity is a story for another day.

Roger Southall is professor emeritus of sociology at the University of the Witwatersrand

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