Voodoo Economics

For the average person living in Zimbabwe, the explanations of the current crisis and the solutions proposed are very confusing. I think this is deliberate because the State does not want us to understand the severity of the situation or the reasons behind the slide in economic output and the sudden cash crisis.

First there is the myth of growth in the economy. This is sustained by statements by otherwise reliable agencies like the IMF and the World Bank that the economy is growing – slowly for sure, but growing. Nothing could be further from the truth.

Last week I showed the revenue and expenditure figures for the Zimbabwean Government from 2008 to 2016 and demonstrated that the State was running a very considerable deficit in its budget – certainly not within the IMF SMP limits and certainly not sustainable. If I cast the same data and use revenue figures to estimate what was happening to the formal economy then I come up with the following table using total collections of tax as 25 per cent of real formal sector GDP:
Year 2008 2009 2010 2011 2012 2013 2014 2015 2016
Revenue 0,280 0,900 1,700 2,800 3,800 4,300 3,800 3,600 3,200
Est GDP 1,120 3,600 6,800 11,20 15,20 17,20 15,20 14,40 12,80
Growth N/A +320 +180 +64,7 +35,7 +13,2 -11,6 -5,27 -11,1

Notes: All values in USD billions with estimates of the revenue in 2008 calculated back from Z$ values. The growth figures are percentages per annum. The revenue and GDP estimate for 2016 has been reduced still further following the first quarter’s results last week.

These numbers bear little relation to the figures put out by the Statistics office in Harare but the only reliable figures are for the actual revenue collected. Those are real numbers in real US dollars and cannot be manipulated. I cannot see how we could be collecting over 30 per cent of GDP in an economy like ours and feel that the South African average of about 25 per cent of GDP is probably more reliable and realistic.

The figures are astonishing – they show that formal GDP rose by a factor of 14 times between 2008 and 2013 – from $1,2 billion to $17,2 billion. This is called bounce back by some – I think it was a combination of the informal economy emerging from the cellars and some growth. The informal economy was always there but difficult to record or collect tax from. When, under the GNU Government and dollarization, confidence returned and the business activity that was always going on under the table, started to cautiously emerge.

This is supported by asking ourselves where did all the hard currency come from in March 2009, to restore fuel to free supply in 10 days after we adopted the USD as a means of exchange? Where did the hundreds of millions of dollars come from that was used to fill our store shelves? The answer is the informal economy.

Then there is the sorry tale of the collapsing formal economy after Zanu PF took back full control of the economy in 2013. Far from showing growth – the economy has actually contracted by 25 per cent. If you think that is not possible then ask any retailer or manufacturer – sales of beer have declined by that amount and continue to decline. Add to that the 5 per cent deflation since 2013 and you get a 30 per cent drop in GDP in three years. That is not a recession – it’s a full blown collapse of the formal economy accompanied by perhaps the closure of a 1000 firms employing many tens of thousands of workers.

As the Government of Mr. Robert Mugabe did from 1997 to 2008, the State has ignored this reality, has not cut jobs or shed unnecessary costs. They have just carried on as if everything was normal. In the first period they had the ability to print money and they did so in ever larger amounts and denominations. The result – a trillion Zimbabwe dollars would not buy a loaf of bread in January 2009.

In the process they bankrupted every Bank, every Building Society, every Pension Fund and all Insurance Companies. They destroyed the cash reserves of every Company and State enterprise in the economy. By the end of 2008 the total value of all the cash in the economy was $19 million dollars and the total collections of tax from all sources was a meager $280 million. Per Capita GDP was about $100 per annum. We were the poorest people on earth.

Now in the second phase of the application of Zanu PF Voodoo economics, we have a similar situation except that this time it is borrowings that have funded their delinquency. Last week I showed how the State had funded budget deficits of $2,7 billion dollars since August 2013. In addition they have dealt with the overhang of debt from the Reserve Bank of another $1,7 billion. They have also taken over some $400 million of non performing loans from the banking system. That is $4,8 billion in new debt on top of the $8 billion owed to international creditors from the era before 1997.

By the start of 2015 it was becoming more and more difficult to cover the gap between income and expenditure. Desperate appeals were made to China and Russia for help with no response except some harsh advice to put our house in order. The decision was made to reengage with the multilateral financial agencies and the State had to do some magic in their numbers to satisfy the IMF that the SMP targets were being met. These were already so low that a child could meet them. Even so I am convinced that the State has had to manipulate their figures to satisfy the organisation.

But the one thing you cannot fiddle are the real numbers and revenues have been declining rapidly: Just look at the first quarter of 2016 – total revenue of $724 million or $241 million a month. Employment costs alone run to $278 million a month leaving a budget gap of $37 million before any other costs. That is 15 per cent. Total budgeted expenditure is $383 million a month and if they are meeting these obligations. That is a monthly deficit in the first quarter of $142 million or 37 per cent of the total.

It is into this hole in the budget that the State has been pouring the remaining liquidity in the financial system. This illegal and destructive exercise has now brought the whole financial system close to total collapse. We have money in our accounts but it is no longer there – it has been purloined by the State and under our very noses.

They really have no choices left – in the past few day’s funny things have been happening in regard to export proceeds (about $8 million a day) and this suggests that they are now also rolling export receipts in a desperate attempt to find more money. It only makes the situation worse.

It is no wonder that they have now, in complete desperation, turned back to the printing presses in the cellars of the Reserve Bank. It will not help them and will simply accelerate the already rapid economic implosion. However the one thing it will do again and that is to strip our long suffering population of the little money they have been able to make during the brief period of sanity during the 4 years of the GNU with the MDC in charge of the treasury.

Only a change of leadership and a new Government can restore confidence and replace these Voodoo economic policies with sanity and growth.

Eddie Cross
Bulawayo 15th May 2016