The Root Causes of the Fiscal and Monetary Crisis in Zimbabwe
Since Zanu PF resumed full control of Government in 2013, Zimbabwe has been sliding slowly, but steadily downhill in both fiscal and monetary terms. I estimated the GDP in 2013 at $17 billion based on the total value of cash collected from our local tax base. Today my estimate is $14,6 billion based on the same measure and this is supported by the Ministry of Finance. That is a 15 per cent decline in our gross economic output in 3 years. In 2013 we had no sign of any shortages of cash in the system – imports were on open general license and all goods were in free supply. Today cash withdrawals are down to a tiny amount each day or week and stringent import controls are back and shortages are manifesting themselves all over the economy. Exports remain stagnant or below the level achieved in 2013 and FDI and Remittances are also down significantly.
What has gone wrong?
The first thing that happened immediately after the elections – virtually in the first two months, was a near total collapse of confidence. Put bluntly the markets voted against the new Government. The stock market fell 30 per cent as investors – largely from abroad, withdrew $1,5 billion from the stock exchange. Then depositors withdrew a billion dollars from the Commercial Banks and suddenly, after increasing by 14 times in 4 years, from $280 million in 2008 to $4,2 billion in 2013, tax revenues, across the board declined, falling from $4,3 billion to $3,4 billion in 4 years.
The near total collapse of market confidence has continued unabated and stocks are now only a third of what they were in 2013. There are no signs of any return of confidence and if people could get their funds out of the banks, virtually every bank in Zimbabwe would face liquidation today. As it is, a third of all banks have closed their doors since 2013 with a combined loss of many hundreds of millions of dollars. This has destroyed whatever is left of market confidence in the banking system.
In a desperate effort to halt the bleeding, the State has imposed harsh restrictions on cash withdrawals and imports. They have floated a new currency and it is rumored that they will shortly issue larger denomination notes. In this case the new currency will take over, virtually completely, as the local means of exchange for cash. At the same time, the budget deficit has ballooned from a small cash surplus in 2012 to a deficit in 2016 of $1,4 billion in a budget of $4,8 billion or nearly 30 per cent, a completely unsustainable figure in any country.
In the latest figures from the stock exchange Old Mutual shares have risen to a premium over the same shares in South Africa and London of well over 50 per cent. In effect this means that balances held in Commercial Banks and in Government stock, has been devalued by half by the market. In effect this means that some $6 to $7 billion has simply vanished this year and every Zimbabwean and company is that much poorer as a result. After holding steady for a number of years, our total national debt, both local and foreign has increased by two thirds from about $9 billion in 2013 to $15 billion today. Interest charges on these borrowings are already beyond our ability to pay and any default on domestic debt will have immediate and grave consequences.
While the immediate collapse of confidence after the elections was the initial cause of this spectacular collapse of the formal economy, the continued decline in our economic and monetary affairs needs further analysis.
I sit on the Budget Committee of Parliament and in the past year, only the Confederation of Zimbabwe Industry (CZI) has stated that the basic cause of our recent problems has been the unsustainable domestic budget deficit. Why other private sector agencies have failed to identify this and continue to point to consequences rather than causes is a mystery to me. But there is no doubt in my mind that it is the budget deficit that is the main driver of the present crisis.
The causes of this crisis are in three parts:, the rising cost of employment in the Civil Service; the decline in State revenues; and the failure by the State to restrict expenditures to fit their income.
At Independence we had a Civil Service of 68 000, the Service was highly professional and a policy of paying salaries at about 80 per cent of the private sector meant that the Service attracted top talent and was, by and large, completely honest. Corruption was at very low levels. Today we have a Civil Service that may exceed 400 000 and it continues to grow. As a result the cost of employment of the Civil Service has risen from perhaps 30 per cent of revenues in 1980 and 60 per cent in 2012 to over 100 per cent of revenues today.
At the same time, revenues have declined by about $200 million a year or 5 per cent, since 2013. This has resulted in the State moving from a small surplus each year from 2009 to 2012 to a significant deficit in 2013 and the 30 per cent deficit in expenditure in 2016. This is unlikely to come down significantly this year. On top of that the Government has completely failed to cut its coat to fit the cloth at its disposal. Within weeks of taking power in July 2013, State expenditure rose by $600 million to $4,8 billion and it has remained at this figure for 4 years despite the steady decline in revenues.
The State deficit has had to be financed and the way the Government has done this, is perhaps the next major problem. They have had no choice but to borrow from the private sector and to strip all State Enterprise of any surplus funds they might be holding. All Commercial Banks and many companies now hold massive amounts of their so called “liquid assets” in the form of Government paper of one kind or another. At the same time they have allowed the State to build up its debt to other agencies so that today several billion dollars of domestic debt exists which is not yet taken into the State balance sheet.
This has resulted in two developments – a tightening of credit to operating companies and agencies and the conversion of cash balances into assets that are at best illiquid and at worst, worthless paper. Treasury Bills are being discounted at up to 40 per cent and it is now likely that interest on these financial instruments will not be paid as the State crisis deepens. The major public symptom of this cash crisis is the decline in maximum daily withdrawal limits from $10 000 a day in January 2016, to $50 to $100 a day today.
These problems in the banking industry are being disguised by the growth in what economists are calling “RTGS Dollars”. These are US Dollar balances that are in fact simply book entries which have little or no chance of being liquidated as real dollars any time soon and maybe never. While consumption is being strangled by this shortage of real money in the market, the productive sector is being strangled by the shortage of hard currency for imports. If they proceed with the decision to issue $10 and $20 “Bond Notes” it will ease the cash shortage but will raise inflation rates and drive what remains of our USD balances underground.
Harare, 14th May 2017