Zimbabwe: An Economic Jungle of Rhetoric

Harare – On the 19th of November, 2017 Zimbabwe ousted Robert Mugabe from power. Mugabe was accused of running the economy down, and more importantly, deserting his liberation allies on the succession race in favour of his wife – Grace.  Many Zimbabweans were convinced that the ouster of Mugabe would usher an era of magnanimous prosperity and unity in Zimbabwe. Let us ignore the politics and focus on the economics.

Last week and without notice as per norm, Zimbabweans woke up to a fuel price increase of 12%. In a fortnight, RBZ Governor John Mangudya would put new $5 notes and $2 coins in circulation to ease cash shortages, but in the process increasing money supply. This month, government increased salaries for some of its strategic civil servants, with more increments lined up for November 2019. Against all these inflationary acts by government, a Zimbabwe state publication last week carried this conflicting headline: “Price madness: Social contract proposed”. Indeed, Zimbabwe has become an economic jungle of rhetoric. 

In 2017, without a social contract, Zimbabweans could afford to authoritatively budget for the next three months owing to price stability. The country was beginning to regain the financial services trust lost in 2008; a year when Zimbabwe recorded the world’s highest annual inflation of 89.7 sextillion percent .This was followed by an overnight total wipe out of all bank balances in 2009 when the country eventually dollarized. After these key lessons of yesterday, what has gone wrong again in Zimbabwe?

In November 2016, the Reserve Bank of Zimbabwe introduced $2 bond notes, a surrogate currency which was allegedly backed by a US$200 million African Export-Import Bank loan. In January 2017, US$15 million worth of $5 bond notes were also released, trading at par with the US dollar. Fast forward to 2018, Zimbabwe Finance Minister Mthuli Ncube rejected the alleged bond notes guarantee by Afreximbank by alleging that a bond note is not equal to a  US dollar. This is how Zimbabwe planted its first speculative seed.

After hinting on it in September 2018, Mthuli Ncube introduced a 2% tax on all mobile transactions on 12 October 2018 through gazetting statutory instrument 205 of 2018. He said that the purpose of this tax was to correct fiscal imbalances in Zimbabwe. Prices of most commodities in Zimbabwe soared by an average 20% in response to this tax law. With this law, government trust disappeared as businesses, labour and consumers were bulldozed despite their resistance to this new law. The first wheel had come off Zimbabwe.

On February 20, 2019 the Zimbabwe government reneged on its alleged Afreximbank bond notes guarantee by floating the exchange rate between the bond note and the US dollar. The argument was that the market is a better allocator of foreign currency than a managed system. However, this intervention was implemented without putting in place proper financial management fundamentals to send the right signal to that market. What followed was a steep fall of the bond note to the US dollar, leading to a mismatch of economic fundamentals, particularly employee salaries and the cost of the consumer basket as measured by the consumer price index. To give a perspective of the negative social impact of the above government interventions, Zimbabwe’s consumer price index averaged 68.57 index points from 2008 until early 2019. As at September 2019, the index stood at 290.40 index points, pointing to a nation in hyper-inflation.

Mthuli Ncube argues that with the exchange rate developments, Zimbabwe has become a very competitive country on the global market. This assertion is in stuck contrast to the views of the private sector, whose role is to fund projects and run businesses. Sugarcane farmers, who are doing well by Zimbabwean standards, are reeling from energy shortages, mainly attributed to climate change, but more candidly to the lack of a robust integrated national resource plan on energy. Local manufacturers have significantly dropped their operational capacities to below 35% in response to foreign currency shortages, energy challenges, water challenges and diminished consumer disposable incomes. This tragedy for manufacturers is a result of lack of business confidence due to government’s inconsistent policies. The financial services sector is not spared in Zimbabwe as insurance policies, mortgage services and pension funds were rendered semi-obsolete by the inflationary environment. The mining sector had to take control of its destiny on energy through funding for its own electricity requirements directly to regional exporters. Without this intervention, the energy dependent mining sector would have collapsed. From January 2019 to date, Zimbabwe has generated close to US$5 billion in foreign currency receipts – enough for all its critical needs. But because of poor resource allocation and financial leakages through corruption, industries are dying, and so are its people in hospitals. Which serious country would go for 60 days without doctors in its public hospitals? Why not use the purported budget surplus and taxes from the 2% tax to plug this health gap pending lasting solutions? Is it morally acceptable for a government to expose the entire nation to 60 days of a health crisis as in Zimbabwe today?

Government Policies Now a Major Threat to Business

The Zimbabwe financial services sector alone has retrenched more than 300 workers in the past two months in response to the tough operating environment. According to Zimbabwe Banks and Allied Workers’ Union (ZIBAWU), the unfolding economic recession has led a fresh wave of retrenchments at CBZ, BancABC, First Capital and Standard Chartered, with Old Mutual embarking on a voluntary retrenchment scheme.

Other sectors are facing the same fate. As Zimbabwe moves in to introduce a third form of currency by value proposition to add to its basket of local currencies, namely the bond notes and RTGS values, without addressing its profound financial leakages, a fresh wave of price increases is inevitable. From an exchange rate perspective, both the official and black market rates are set to shoot. Lastly, in functioning economies, government’s role is to create a stable and predictable environment for businesses and citizens to flourish. In Zimbabwe’s case, their government is arguably the major threat to business and commerce owing to its perpetual appetite for disruptive policy interventions. History does not lie. We still remember that when bond notes came, they were an export incentive, with bond coins coming in to provide smaller denominations for ease of transactions. Today, bond notes are a currency. What guarantee do Zimbabweans have on the functionality and discipline of their monetary authorities regarding the quantum of the new notes and coins in circulation? Before any talks of a social contract, the Zimbabwe government must be socially conscious. The solution to Zimbabwe’s financial problems lies in stopping this financial vicious cycle, gaining public trust, decisively dismantling the forex cartels, and plugging the financial loopholes. These are governance issues within the full control of the Zimbabwe government and a sincere leadership must Stop It.