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A Fresh Start for Zimbabwe

IN February 2009 Zimbabwe was the only country in the world without debt. Nobody owed anyone anything. Following the abandonment of the Zimbabwe dollar as the local currency all local debt was wiped out and the country started with a clean slate.

It is now a country without a functioning central bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies.

The US dollar is the de facto currency in use although the euro, GB pound and South African rand are accepted in local transactions.

Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Supermarket shelves, bare in January, are now bursting with products.

I recently visited Zimbabwe in the company of a leading Australian fund manager. As a student of monetary history, I was interested to see what had happened to a country that had suffered hyperinflation.

How did the people cope? How is the country progressing now? The current Zimbabwean situation is complicated by the fact that President Robert Mugabe is determined to stay in power whatever the cost.
There are common denominators in all hyperinflations.

Generally government finances reach a point where large budget deficits cannot be financed by taxes or borrowings. The choices come down to austerity (with the government cutting back its spending) or by funding the deficit by creating local currency through the printing press, leading to the inflation tax.

In Zimbabwe, Mugabe has made it his mission to remain president for life. This has caused him to infiltrate his supporters into the army and police force.

He also used government finances as a way of funding patronage. His use of the printing press was liberal and nobody was prepared to stand up against him. This eventually led to inflation gathering momentum to the point where the armed forces were getting rebellious — they wanted more money.

Shortly after Mugabe was elected prime minister in 1980, the Zimbabwe dollar was worth more than the US dollar. The ongoing abuse of the financial system eventually produced a runaway inflation. The largest bank note issued in Zimbabwe was for 10 trillion dollars. These notes are now collector’s items.

The worst trauma for ordinary people during the hyperinflation was lack of food. This was due mainly to the imposition of price controls. The result was that production and imports just dried up, hence the empty shelves in the supermarkets.

People survived by shopping in neighbouring countries and relied on assistance from South Africa and aid agencies. Companies survived the hyperinflation with great difficulty and often by ignoring laws. Although companies were left without debt post-February 2009, they were also left deficient in working capital and had dilapidated plant and equipment. Regular repairs and maintenance could not be afforded. Most companies now require urgent recapitalisation.

There has been a major exodus of Zimbabweans over the years, estimated at about three million prior to 2008. Many of these were qualified people who were subjected to Mugabe’s campaign of terror. During the latter stages of the hyperinflation there was a further exodus because people were starving. Most of these people went south into South Africa.

Current economic activity is strongly supported by remittances from Zimbabwean migrants to their families in Zimbabwe. Once the political situation settles down, it is likely that many of these migrants will wish to return to Zimbabwe. Some have already done so. Many activities that perished in the hyperinflation, such as insurance, are now starting to resuscitate.

Credit financing activities are starting to revive. Visa credit cards are once again operating successfully in Zimbabwe, others will surely follow. Banks have had both sides of their balance sheets devastated by hyperinflation and now have no lender of last resort to call on. They are understandably cautious in lending the deposits that are slowly filtering back into the system. Banks also lost much of their equity capital.

In a country with no debt, only assets, people and companies are under geared. With the ultra cautious lending policies of the banks, there is a huge opportunity for foreign investors in the credit purveying industry.

There has been a sharp rise in economic activity since February. Real wages have risen substantially compared to a year ago. Whatever workers were paid in Zimbabwe dollars during the hyperinflation bought virtually nothing. Now even the minimum wage of around $100 per month allows for basic purchases.

Corporate profits are rising, leading to greater tax revenues for government, augmented by rising value-added taxes.

The improvement in the economy will become dramatic once Mugabe leaves the scene. At that time aid agencies, NGOs, charities and foreign governments will start injecting large volumes of funds and assistance into the country.

With Mugabe out of the way and the economy recovering strongly, one could reasonably anticipate that a large proportion of the Zimbabweans living overseas will return to the country bringing welcome skills and capital.  Indeed foreigners will also be attracted to investing in the country in those circumstances.

It is fascinating to see how rapidly the economy is recovering. It is a great testament to what can be achieved in a free enterprise environment by the elimination of controls combined with the institution of new money that people trust. It needs to be money that their government cannot create via the mint.

The economic future of Zimbabwe is likely to be in mining, agriculture, tourism and service industries, especially those providing infrastructure and maintenance facilities.

Clearly, Mugabe was responsible for the hyperinflation. The causes were those always present in these events. A weak economy, large government budget deficits, inability to borrow funds combined with the political decision not to cut government spending.

A very important factor in assessing the current situation is that Mugabe no longer has his own private source of funds to continue with his system of patronage.

Mugabe’s power base must be disintegrating rapidly. He has also become very unpopular. It seems unlikely that he could win an election again, even if he managed to get his thugs to resort to intimidation. People identify Tsvangirai and the MDC with the new monetary disposition and the improved economy, while Mugabe is correctly blamed for the trauma of hyperinflation.

There is also the question of sanctions. In recent speeches Mugabe has said that it was time for sanctions against Zimbabwe to be removed. This is nonsense. It is Mugabe and 200 of his associates who are under sanction by the US and other countries under the Zimbabwe Democracy and Economic Recovery Act. This prevents them and their families from travelling overseas and freezes their external bank accounts.

This combination of circumstances, combined with the fact that he is 86 years old, suggests that Mugabe must be under pressure to resign. It is a logical deduction that behind the scenes Mugabe must be attempting to negotiate a form of amnesty against prosecution. This month is important as Sadc, which guaranteed the terms of the recent inclusive government, has given Mugabe until Sunday to comply with all outstanding issues.

Having seen the impact of hyperinflation at close quarters, my view is that this is the least desirable method for eliminating excessive debt. The population has been traumatised physically (starvation), mentally and financially. Most people did not have foreign assets or local tangible assets, so lost virtually everything. The companies survived using unusual skills, ignoring laws and protecting working capital by holding foreign currency or purchasing equities.

In Zimbabwe the serious problem of the land issue remains to be resolved. Tsvangirai indicated that security of land tenure was vital.  One option is the Zambian model where all land was nationalised followed by the issue of 99-year leases to property holders. The MDC will also look at some form of compensation for farmers who have been dispossessed. They are anxious to see a land audit set up, but Mugabe is stalling on this for obvious reasons. — www.kitco.com.

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