IT was Irish statesman Edmund Burke, author, political theorist and philosopher, who first warned that those who do not know or ignore history are bound to repeat it; usually with tragic consequences.
Editor’s Memo,Dumisani Muleya
Burke’s observation came flooding to mind this week as government battled to contain an imminent economic implosion which many warned about after Zanu PF won the 2013 controversial general elections. Of course, Zimbabwe has gone through a worse economic meltdown during the 2007-2008 hyperinflationary era which ravaged the economy, destroyed savings and pensions, and decimated the Zimbabwean dollar. The scars of that crisis are still visible on the economic landscape.
After that period of economic collapse and suffering amid fierce political repression and human rights abuses, Zimbabwe’s economic situation steadied following the adoption of a multi-currency system, which has now morphed into virtual dollarisation.
This came against a background of a coalition government between Zanu PF and MDC formations in the aftermath of the bloody June 2008 presidential election run-off in which President Robert Mugabe claimed a smash-and-grab victory through intimidation and violence spearheaded by the military.
Mugabe had in March that year lost the first round to MDC-T leader Morgan Tsvangirai, whose party had also marginally defeated the ruling Zanu PF. Tsvangirai pulled out of the run-off citing brutality and killings. Now we seem to have come full circle — 2008 beckoning. Zimbabwe’s economy, once among the most advanced in sub-Saharan Africa, has become one of its most vulnerable, although some pillars of its strong foundation remain. In 1980, GDP per capita in Zimbabwe was higher than in most of its neighbours; manufacturing accounted for a large share of GDP; and its currency was stronger than the United States dollar. However, the country was also characterised by social and economic inequalities. While Zimbabwe has made some progress on social indicators, human capital development in particular, much of the economic base has been badly eroded.
Policies like the land reform programme after 2000 and indigesniation have helped ruin the economy.
Following the economic downward spiral, the brain-drain intensified. Despite the challenges, a vibrant private sector and a burgeoning informal economy have demonstrated surprising resilience — a testament to Zimbabwe’s solid base. Hyperinflation led to the liquidation of the Zimbabwean dollar and adoption of a multicurrency regime following one of the worst inflation episodes in modern history. As the US dollar strengthened against the rand in the mid-2010s, it took over. The new currency system anchored prices and helped improve policy stability, but the regime was imperfect from the start, as the net external and fiscal positions were negative, the Reserve Bank of Zimbabwe was not adequately capitalised, the financial sector was weak, and liquid assets were scarce.
Piecemeal policy reforms, structural rigidities, and exogenous shocks drove an overvaluation of the real exchange rate and the consequent decline in competitiveness. In the absence of monetary policy instruments, the wage regime was not sufficiently flexible to respond to shocks, driving an expansionary fiscal stance.
High public-sector wages, in turn, were reflected in other salaries and prices, which became sticky downwards. Structural and governance weaknesses made provision of public goods expensive. With weather-related shocks and nominal exchange rate depreciations in key trading partners, the current account deficit remained high, reserves were nearly depleted, and external competitiveness suffered. Subsequently, the multi-currency system became unsustainable, resulting in the introduction of three quasi-currency instruments to facilitate transactions: bond coins and then notes, electronic balances, and Treasury Bills (TBs).
Not surprisingly, the bonds notes, RTGS and TBs have not resolved Zimbabwe’s liquidity problems. If anything, they have aggravated it. We are back on the road to 2008 once again despite official denials and threats amid panic and confusion.
Finance minister Patrick Chinamasa’s panicky emergency measures — law and order instruments to deal with market dynamics and forces — introduced yesterday, like before and during the 2008 hyperinflationary era, are simply unworkable and doomed to fail.