Scraping the Bottom of the Barrel

For nearly 3 years the Government of Zimbabwe has been living beyond its means, not by a small margin, but massively. Deficit financing is nothing new but if it is not underpinned by growth, stability and confidence, it is simply not sustainable. Up to 2008 the State simply printed money to cover the shortfalls between revenue and expenditure. The consequence was a near total collapse and the instillation of a Government of National Unity.

It seems as if they simply do not recognise the dangers of this sort of economic delinquency. By my calculation the deficit in government spending since 2012 has reached mammoth proportions – revenues have declined and they have tried to maintain expenditure at GNU levels. In 2015 the deficit must have been at least $1,2 billion with revenues about $3,6 billion and expenditure $4,8 billion. It may have been a bit lower if they curbed some spending, but it could not have been less than $1 billion – that is 22 per cent of all State expenditure.

In 2016 the gap has widened still further with revenues 16 per cent below budget and 9 per cent below last year. Total revenues are now 12 per cent below the total cost of salaries and pensions.

To fund this gap, the State has been printing Treasury Bills and dishing these out to all and sundry in place of payments and debt and as a means of drawing in cash from the open market and State controlled enterprise with a cash surplus. This avenue is now exhausted – they simply cannot issue more TB’s and all available sources of cash are closed to the regime.

So now they have crippled the entire banking system by withdrawing cash from the transit funds flowing through the Reserve Bank. This has created a serious shortage of cash in the market which is being exacerbated by a collapse of confidence in the banks and massive cash withdrawals. Now a market for cash has emerged with a premium of up to 15 per cent. Business is no longer banking their cash as they seek to benefit from the shortage of cash and the available hard currency is being diverted into the informal economy.

The consequence is a downwards spiral that, like a tornado, will destroy all in its path. This situation is moving very fast and is now totally out of control. The latest evidence of the desperation of the authorities and the times; is the attempt by the Reserve Bank to commandeer half of all export proceeds. This smacks of the pre 2008 collapse era when the Reserve Bank withheld 35 per cent of all export proceeds for its own use and replaced it with local currency at an artificial exchange rate set by the Bank internally.

Their attempt to disguise this operation by saying that the funds would be replaced within 48 hours by means of a wire transfer of funds from the Bank but accompanied by an advisory restraint on the banks not to use these so called “funds” expressed in US Dollars for external payments. In other words these replacement funds are just that – a paper figure without convertibility. Just another form, like the TB’s of a local currency.

They then used the funds withheld to buy real US dollars in the United States for local distribution – but no sooner than these new notes hit the market than they will vanish into the undergrowth that hides the shady world of cash trading and informal sector activity.

This new desperate measure will shortly be followed by the attempt to introduce Bond Notes as an extension of Bond Coins. The problem with “bad” money is that it drives out the “good” money. People will hoard the latter and try to get rid of the former – at any cost. When these new notes hit the street a market will emerge and this will set their value. The moment they cannot be exchanged for “real” money, they will be worthless.

What I find so difficult to understand is how and why the Minister of Finance and the Governor of the Reserve Bank could have allowed themselves to get into this mess. These are both intelligent men with considerable experience in Government and this silly argument that they use for the Bond Notes that these will somehow be used to stimulate exports. Just who do they think they are fooling? Do they think the IMF will buy that explanation? Do they really imagine that the millions of street wise people in the informal sector will be duped? If they do, then I confess I am gravely wrong about them – they are the most stupid of our idiotic Government.

But there is a more immediate crisis emerging from this shambles. In 2012 the Government of National Unity was persuaded by the Minister of Finance (Biti) that the country to should try to reengage with the IMF and the World Bank in an effort to deal with the national debt and to try and get access to global banking systems and low interest rates on new debt.

They agreed and the result was detailed and painstaking negotiations with the IMF leading to the signing of a “Staff Monitored Agreement” with the Fund. When Zanu PF took over in mid 2013, they decided to continue with the programme and as a result Zimbabwe has been working with the Fund for the past 4 years. This has led to the completion of two formal SMP’s and in September last year, the Zimbabwe Government was able to sign an agreement with the Fund in Lima, Peru, which opened the door to negotiations over the country’s debt and the possibility of new funding.

This culminated in a meeting of the main Board of the IMF meeting in Washington this year, where the Directors (representing the shareholders) agreed to pursue the next stage. Two days later, without consultation or notice, the State announced its decision on the Bond Notes. There are many bad decisions a debtor can make in life, two of these are; you never lie to your banker; and you always give him notice of any major changes in your affairs. Zimbabwe broke all the rules and now we might have to face the collapse of the Lima Agreement and watch our relationship with the Fund and through the Fund with all the agencies of the multilateral financial system, go back into the freezer.

That will exacerbate all our other problems and be a major setback to the effort to reengage and normalize our relationship with the global political and economic community. It will make it more difficult to raise funds for major projects and this will make any economic recovery that much more difficult.

I simply repeat the mantra that I have been saying for some time now. This crisis can only be addressed and resolved by a change of Government and new faces and policies. Nothing else will turn us around and point us in the right direction.

Eddie Cross
Harare, 23 May 2016