How do we get out of this hole?

I cannot believe it’s the end of the year – where did 2016 go? One thing I know for certain and that is if nothing changes here, we are in a hole so deep it is beginning to feel as if there is no way out. By my calculations the Government in Zimbabwe has now converted all surplus cash in the formal sector of the economy into some form of State debt – treasury bills, an overdraft at the Reserve Bank and a programme to expropriate the hard currency earnings of our exporters at $200 million a month.

The delinquency of this regime has no limits, not satisfied with the theft of State revenues at over $2 billion a year through rampant and in certain cases carefully managed corruption, they have expropriated the hard earned cash savings of the entire country for the second time – last time it was between 2000 and 2008. The mechanism used then was hyper inflation caused by simply printing money in vast quantities.

This time they have run a budget deficit of over 20 per cent for three and a half years and in the process the State, through the Ministry of Finance and the Reserve Bank have borrowed all the formal sector savings from the GNU era. The most visible sign of this are the long queues at banks when people try to get their money out of the banks. I have news for them – their money has gone and all that the banks can give them is a small trickle of hard currency supplied by the Reserve Bank from hard currency expropriated from exporters.

This has got to the point where it is becoming more and more difficult to get money out of the banks and finally the regime has resorted to printing a new local currency to try and fill the gap. The commercial Banks support this measure because it means that they can sell Bond Notes at par with the US dollars and thereby reduce their US dollar obligations to their clients. The Reserve Bank is delighted because they can now sell notes in US dollars after printing them at a cost that is a few cents per dollar note. Those who owe others money are also delighted as they can see themselves being able to buy the new currency at a significant discount and then settle their US dollar credits at a fraction of their real value.

But on the down side, anyone who works in the formal sector for a salary and is paid through the Bank will now have to draw his/her money out of the Bank in a currency that will depreciate rapidly. This means that by these means the regime will achieve what they cannot do through the front door – a sharp reduction in the cost of employment. The new currency is selling on local markets at 2:1 against the US dollar and this can only depreciate as time goes by. In the short term they may be able to get full value from traders in goods, but not for long. Market prices are already rising and real inflation is again a possibility as the new currency replaces the hard currencies in circulation.

Some major traders are reporting brisk business – people are buying bond notes and using them to buy goods at the face value of the new notes. They are speculating that in a month or so, prices will have risen and goods will be in short supply. I cannot see any reason why they should be wrong. All government departments will now be paid in the new currency and local authorities will have to accept the new notes at par with the US dollar.

In essence what we have here is a State sponsored and administered Pyramid scheme and every Banker should be watching their USD obligations building up in their accounts with alarm. They have no chance of ever meeting their obligations to their clients until the State starts meeting its obligations to buy back treasury bills with real dollars plus interest and to wipe out its overdraft at the Reserve Bank in the same way. On its own there is absolutely no chance of this being possible any time soon, some might say, ever.

Is there a solution to these problems, is the question everyone is asking. The answer is yes, but it will take surgery and a long period of recuperation. Let’s look at what is required.

Firstly, although our problems are largely economic, the solution begins with required political changes. For a start, the 92 year old geriatric in charge of our affairs has to step down – there is no way that any solution can be made to work while he is in his present position. Mr. Mugabe has to go – and as soon as possible.

Secondly, we need a peaceful, orderly and legal transfer of power to a successor who can steady the ship and chart a new course forward. I think everyone knows what that might mean.

Thirdly, the new Government must move swiftly to calm local markets and reassure investors and the international Community. The latter will not be satisfied with rhetoric – they will want fundamental commitments to change in both political and economic policies against a strict time table.

Fourthly, the new regime must deliver what it promised and take the country to the next elections which, this time, must be held under free and fair conditions compliant to regional standards as expressed in the SADC protocols.

Fifthly, an election must be held that meets every ones expectations and allows a new democratically elected government to come to power.

That is the political road map and this could take 6 to 18 months to implement. While this is going on the Country must make the necessary sacrifices to restore economic stability – that starts with restoring fiscal discipline and eliminating the budget deficit. Providing this is achieved and the political road map is delivered on schedule to every ones satisfaction, then a stabilisation and growth plan can be implemented with IMF/World Bank help.

This programme could be delivered in two stages – the first of which would be implemented during the transition to a democratic election. This would involve some emergency stabilisation funding and humanitarian relief to help restore stability and to deal with the liquidity problem and meet basic human needs. This would require that the Government do its part – reduce expenditure and wipe out the budget deficit and remove obstacles to growth – including scrapping indigenization requirements and restoring the rule of law and property rights.

By the time we came to the elections, the above economic programme would have started to deliver growth and some stability. The time would also be used to negotiate a major debt programme for the post election phase. By my estimates the debt programme would have to take care of up to US$30 billion in government debt. This should be possible and as soon as this is put in place a programme to get the economy, growing at double digit rates for the next 20 years. This will rapidly enable the country to meet its international and local obligations with low inflation growth that will generate millions of new jobs and gradually formalize the economy.

I cannot see any other way out of this hole we are in and the main goal in the short term must be to stop the people in charge from digging us in any deeper.

Let’s just pray that that does not take real violence.

Eddie Cross
Bulawayo, 2nd December 2016