Can Zimbabwe’s economic crisis get any worse?

June 12, 2008

By Lance Mambondiani

THERE is no shortage of superlatives to describe the state of the Zimbabwean economy.

According to statistics the country has the worst economy in the world. But can it really get any worse when every economic indicator suggests we have hit rock bottom. Without a bold change in policy direction, the economic outlook remains bleak. The truth is economic fundamentals can deteriorate further and inflation can still get worse.

Zimbabwe’s inflation is hardly history’s worst. In Weimar Germany in 1923, prices quadrupled each month. During hyperinflation in Yugoslavia, shoppers would use wheelbarrows to transport bank notes for a shopping expedition.

There is a certain surrealism associated with analyzing the Zimbabwean economy; good news is as scarce as the US dollar in Harare. The impact of the economic collapse is felt on every street corner and by every business. The country has been in a deep recession and hyperinflation for the last decade.

The impact of both on ordinary Zimbabweans has been retrogression back to the Stone Age. Besides breaking records as the country with the highest inflation rate in the world, it is the comparative difference with other top five countries rated on the current high inflation list which highlights the Zimbabwean problem like a sore thumb.

The second highest inflation is that of war-torn Iraq, with an inflation rate of 53.2 percent,. Next in line are Guinea (30.9 percent), Sao Tome and Principe with 23.1 percent and Yemen at 20.8 percent. Economists say that it is a miracle that Zimbabwe’s economy is still surviving with the unprecedented rise in prices and an unemployment rate of 80 percent.

So why is it that there are few, if any positive economic forecasts on Zimbabwe?

The Zimbabwean government itself is deeply torn and conflicted between an interventionist, command control policy prescriptive approach and a free market approach to economic policy. This has been typified in contradictory policies such as the floating of exchange rates and the price controls or the high level fight against inflation (‘enemy number one’) but expanding quasi-fiscal activities thereby increasing money supply growth.

The result has been a blend of less than austere economic experiments, unsuccessful anywhere else in the world. Beyond the short-term need for political survival, the country’s economic model remains uncertain, if not non-existent.

On a balance of probabilities, weak policy formulation and implementation has been as responsible for the economic crisis as the ‘declared and undeclared sanctions’. It is possible to find sympathy with a school of thought which suggests that Zimbabwe has more of a ‘governance’ problem than it has an economic crisis.

The recent rise in inflation has been entirely man-made. Inflation surged between February, March and April following the sudden rise in money supply that flooded the market to finance the March 2008 elections and the June 27 presidential run-off. Reflecting this increase, the money market is currently in a huge surplus, peaking at $15 quadrillion last week.

Unconfirmed reports indicate an increase in annual inflation from 355,000 percent in March 2008 to 732,000 percent in April and 1,700,000 percent in May. This translates to a monthly inflation of 224 percent in March, 314 percent in April and 261 percent in May which matches fundamentals on the ground. The late great Milton Friedman told us that inflation is always exclusively a monetary phenomenon.

The recent paralyzing rise in money supply has been a major contributory factor to rising inflation. The central bank has never denied that it has been printing money to fund some of the country’s critical supplies. This indeterminate rise in Money of Zero Maturity is considered to be a reasonable proxy for watching the movement of M3, which is the broadest measure of money supply.

The huge rise in inflation has also in part been attributed to the depreciation of the Zimbabwe dollar on the inter-bank foreign exchange markets. Since the floatation of exchange rates, the Zimbabwe dollar has been depreciating by an average of 20 percent daily due to sustained pressure on an unsupported market. The parallel market has been ferociously resurgent, with the interbank market playing catch-up.

Although the reasons for the dominance of the parallel market are varied, there could be other dynamics at play. Often neglected is the fact that with industry utilization at less than 10 percent, there have been little or no exports. Companies have also been discouraged from investing on the local market due to the general uncertainty about the future values of their currency holdings or investment portfolio which in turn leads to low levels of employment and economic growth. The market for ‘free funds’ often from people in the Diaspora sending money to their relatives has become the major source of foreign currency. Currently, the exchange rate tends to be driven by money transfer rates than by the semi-liberalized interbank market.

Addressing the country’s economic problems will not be easy but a turn-around is possible. The central bank has introduced a couple of good policies which have gone unsupported by business due to polarity or simply contradicted by politicians in aid of political rhetoric.

The liberalization of the foreign currency market is one such policy. Analysts have been calling for the liberalization of the currency market as a measure to address economic imbalance, now that the market has been liberalized, there is a growing call to return to a fixed exchange rate due to spiraling prices and skyrocketing inflation.

This would suggest that our economic crisis cannot be resolved by addressing a single policy with contradictory ones still in place. It’s like patching up a hole in a threadbare shirt with a new cloth, sooner that later, the holes will start showing again.

What the economy needs is an urgent overhaul of the entire financial architecture and a government capable of identifying and addressing the core of policy dysfunctions. Although economic growth may be long on the horizon, economic stability is achievable.

(Lance Mambondiani is an Investment executive at Coronation Financial Plc in the United Kingdom. He can be contacted at coronation.uk@btinternet.com)

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Comments

3 Responses to “Can Zimbabwe’s economic crisis get any worse?”

1

Nicolas Dixon says:

June 12, 2008 at 11:58 am

Two things need to be said about the Forex Market, which is in fact keeping government, business and the man on the street alive:

1) The central bank, yes, has liberalized the forex market, but significantly only partially. As a result, the market is a one-way system whereby everyone can sell their foreign exchange into the system, but they can not get it back (buy), except for the government (via selling the forex to central bank for government which then access it at a give away token cost using the readily printed Zim dollars). So the inter-bank market is only a sytem to feed the establishment and whatever they consider to be the national priority.

2) The parrallel and inter-bank market are perhaps the only reason why the Zim dollar, increasingly values-less as it may be getting by the hour, is still being printed and accepted as a means of payment in the economy. It is also the key to why the government is still financially surviving. For, as long as the central bank is able to print whatever Zim dollars tthey desire and are able to then use for their local payments and also to buy forex on the thriving FX market, then surely the government can not go FX and ZWD broke (unless the money printing machines break down and/or the forex market suddenly got dry). Now imagine a situation where dollarization (switch to foreign currency for all payments) were to happen – by policy or people’s resolve – then no one in this country would accept the Zim dollars being printed by the central bank. Government would wake up to find that they have hordes of Zim dollars (printed by central bank and a little from taxation) which no one (never mind their legal tender status), and perhaps not even the government’s own workers including those in uniforms, accepts! That would simply be the bloodless but dead(ly) end of the road for the government coffers. The rest ,as they say, would be purely history! So, here is the ‘catch’: in the absence of exports of goods and services from Zim, for the government, the more human beings that can be ‘exported’ out of the country into the diaspora, the more chances that these people will work and earn some forex part of which they then remit back home and thus feed the ‘golden’ forex market (black, grey or formal), which in turn keeps the establishment intact and Zim dollars acceptable.
2

baba wayne says:

June 12, 2008 at 2:11 pm

superb informative journalism here. i give this article a four and a half star rating.
3

Elliot Jones says:

June 13, 2008 at 12:47 am

Excellent article Lance. Zimbabwe needs Analysts like these who can dissect and articulate the economic problems and provide solutions on how to address them. I agree that the Zimbabwean economic crisis is self afflicted. There are many countries who managed to stabilise their economies despite sanctions. SA is one of fthem. The economic crisis is a clear result of lack of informed policies by the ZANU PF government.