The Collapse of the Zimbabwe Economy

Zimbabweans have seen it all before. From 1980 to 2000 the State averaged a 9 per cent budget deficit with the Government spending more money than it was collecting and borrowing money to bridge the gap. By 2000, national debt had risen from a paltry $700 million in 1980 to ten times that in 2000. In addition the State had been assisted by billions of dollars in aid inflows from the bilateral donors and multilateral financial agencies.

In 1997 the Government mounted an exercise to pay the veterans of the Liberation War some Z$3,5 billion in reparations (about US$1 billion) which was not budgeted and exacerbated the deficit in State funding. Then in 1998 the Government committed themselves to a war in the Congo at the cost of US$1,5 million a day and over the next three years spent another US$1,5 billion on the war outside the budget. Together these two measures pushed the budget deficit to unsustainable levels and the Zimbabwe dollar began its headlong dash to destruction.

These actions were exacerbated by the systematic destruction of agriculture and together with continued unsustainable budget deficits and the suspension of aid and new funding from abroad, began to drive the inflation rate and the rapid decline in the value of the local currency. The State was forced to resort to printing money and by 2008 the local currency was worthless – inflation reaching historical highs for countries in conflict. The real value of revenue to the State declined to US$280 million – per capita incomes of US$120 per annum. Average salaries for the working population were US$5 per month. All State institutions were dysfunctional and schools only ran for 28 days out of 365. The economy crashed.

Our neighbors were forced to intervene and this led to a Government of National Unity in February 2009. The impact of the GNU and especially the takeover of the Ministry of Finance by the MDC made an immediate impact and in the next four years the GDP rebounded by a factor 14 reaching an estimated US$17 billion in 2013. Inflation collapsed and a policy of strict controls over expenditure created a small budget surplus each year. By 2013 incomes per capital were US$1300 per capita.

Then came the July elections and without the reforms required to restore democracy and freedom of association and speech, the Zanu PF Party supported by the Military Junta, engineered a massive victory over the MDC T. They achieved a two thirds majority and Mr. Mugabe was returned to power. The economic consequences were immediate – a billion dollars in cash fled the Banks and 9 Banks failed losing another US$1 billion of depositor’s funds and undermining the fragile faith of the people in the Banks. Another US$1,5 billion fled the stock market leading to an immediate collapse of values by a third. Another third in value was lost over the following two years.

But in the first flush of victory, the State President instructed the Ministry of Finance to pay a massive increase in Civil Service salaries. This raised total expenditure to US$4,8 billion in a situation where total revenues were projected at $4,3 billion – an unplanned budget deficit of $500 million.

In 2014 the State maintained the level of expenditure incurred in 2013 at $4,8 billion but the economy, after expanding rapidly from 2009 to 2013, suddenly moved into recession. Revenues fell to $3,8 billion – doubling the budget deficit to $1 billion. The same happened in 2015 when revenues declined to $3,6 billion and State expenditures remained at the unsustainable level of $4,8 billion. By December 2015, the State had built up a stock of Treasury Bills of $2,0 billion and in addition owed money to everyone.

Under pressure from regional currencies which were in free fall and using the strong US currency as the main means of exchange, the Zimbabwean economy contracted from $17 billion in 2013 to $14 billion in 2015. At the same time inflation rates turned negative and averaged minus 2,5 per cent in 2015. The downturn in the commodity cycle and continued failure in agriculture coupled to a sharp down turn in new investment suddenly made Zimbabweans look at their circumstances and ask themselves if things could get any worse.

They did not have to wait very long for an answer. In January to April 2016, the State was forced to take extraordinary measures to find the money for salaries, pensions and a much bigger food import bill. The liquidity crisis created by these measures escalated rapidly and by April the Reserve Bank was having to manage payments to protect essential supplies. The money transfer systems managed by the Bank (the RTGS system) slowed down progressively until business was panicked by their inability to pay their suppliers on time. Then the crunch came and one Bank after another began restricting access to ATM’s, banking halls and cash withdrawals.

Panic set in at the Reserve Bank who recognised that if nothing was done the whole banking system could crash taking with it what remained of the formal economy. So yesterday we saw a whole raft of measures by the Reserve Bank designed to curb the demand for cash and to try and protect the Banks. In particular the Reserve Bank Governor did something that until now has been totally taboo – he announced that the printing presses were running again and that a range of “Bond” notes would be introduced with a face value of 1 US Dollar to 1 Bond Note. He also announced controls on imports to protect the balance of payments and restrictions on daily cash withdrawals – something that is already in force by the Banks themselves and some limiting withdrawals to a small sum (as low as $20 a day).

Some of his actions were difficult to understand – he announced that exporters would be credited with export proceeds in the proportions of 50 per cent USD, 40 per cent Rand and 10 per cent Euros. Even as he spoke the Rand collapsed by 5 per cent and is expected to continue to depreciate and this underlines the negative view of the public of the Rand as a store of wealth and exchange. When the new currency notes are introduced I doubt if they will find acceptance in the markets. Certainly any attempt to pay the Civil Service in Bond currency would be fiercely resisted.

What we have here is a perfect financial firestorm and in my own view the final collapse of the economy is threatened. So what can be done; the first thing is to face up to the truth of the matter. This government has failed completely and does not have a clue as to what to do. They must deal with the political crisis that this creates as a first priority – Mr. Mugabe must retire immediately. Then we need a National Government made up of our best people irrespective of political affiliation and put them in charge of our affairs with a mandate to fix things.

Their first priority must be to complete the reengagement process initiated by the MDC in 2012 and to restore normal political and economic relations with the rest of the World. Then we have to cut our cloth to fit our capacity and to introduce tough fiscal and monetary controls and changes. These should not in any way interfere with the economic freedoms gained in the GNU and restoring confidence and hope in the country has to be a top priority – without confidence and hope no recovery is possible. This time we do not have the regional or the international community to rescue us and if we do not do this ourselves, we have only ourselves to blame for the consequences.

Eddie Cross
Harare 6th May 2016