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What has really gone wrong?

When the Government of National Unity (GNU) was formed in February 2009, the Zimbabwe economy was not just in crisis, it was in meltdown.

Eddie Cross,economist

Real revenues in US dollar terms were a paltry 22 million dollars a month. Average civil service salaries were worth about US$5 dollars a month. Seventy-five percent of the population were on internationally-funded food aid and schools were closed and hospitals malfunctioning.

The extraordinary thing about that moment in time was that the very people who had got us into this unholy mess knew exactly what was needed to fix the problem and it was Patrick Chinamasa, the then Finance minister, who came to parliament and announced the reforms that were to turn the country around in a matter of days. He dollarised, removed all controls on prices and exchange controls and overnight we became one of the most liberal economies in the world.

The consequences were extraordinary —revenues to the state (and therefore Gross Domestic Product) rose from US$280 million in 2008 to over US$4 billion in 2013 — an increase of 14 times in five years.

The reasons why there was such rapid growth or recovery were many, but the fact remains that average growth over the four years of the GNU was close to 70% per annum.

After world record-breaking inflation, Zimbabwe breaks all the records in growth! It was partly “bounce back”, formalisation of the hidden economy in the form of the informal sector and a return of confidence.

The fiscal policies imposed by the GNU Finance minister Tendai Biti, involved a simple mantra — we would “eat what we kill”.

In other words, we only spent what we collected and budgeted for a small surplus in revenue over expenditure. Civil service salaries were tightly controlled at roughly 60% of revenue. This was accepted because the service came from such a low level and salaries were adjusted by a significant margin every year.

Immediately the new government was sworn in 2013. This fiscal disciplines was abandoned, and the civil service was not only expanded, but also given a salary increase that was well in excess of our capacity to fund the measure. The consequence was that the surplus planned in the last Biti budget (2013) of US$100 million was turned into a significant deficit of US$500 million.

Since then it has been downhill all the way.

What this chart (top) shows is that since 2013, the government has continued increasing expenditure while revenues have stagnated or declined. The resulting fiscal deficit has spun out of control and could reach 15% of GDP in 2017. This is completely unsustainable and has resulted in a build-up of domestic debt to the point where it now exceeds our international liabilities.

This has to be funded and the state has resorted to radical measures to do so — we now have several forms of local currency — bond notes which are an actual currency, “Real Time Gross Settlement (RTGS) dollars” and Treasury Bills.

All these forms of currency are now trading at different market rates. On top of that, if you want to move your money outside the country, you can buy a share on the local market, which can be sold in Johannesburg or London. The discounts range from 40 to 80% and are increasing almost daily. One casualty of this fiscal situation has been the disappearance of cash from the formal banking system as is illustrated below.

To maintain cash supplies for normal trading purposes most banks would require about 15% of their deposits to be in cash form. Clearly this is no longer the position.

Even more worrying are the developments in the foreign currency market.

In 2009, the foreign currency needed to restock retail stores, purchase essential inputs and generally finance imports came out of nowhere.

This involved hundreds of millions of United States dollars. When the government changed in 2013 this process was reversed and suddenly we are back in a situation where foreign exchange is being rationed and our essential needs are not being covered.

The decision by government to reintroduce exchange control and to convert foreign earnings into local currency has further compounded the situation. Any exporter whose export earnings are converted into RTGS dollars cannot pay their external liabilities and they must take an 80% discount on the real value of those earnings. All exporters are now under threat unless they can protect themselves in some way.

Firms are being forced to buy foreign exchange in the open market when they fail to get a formal allocation from the Reserve Bank. Because of the discounts they are obliged to pay using either bond notes or RTGS, the cost of all imports funded by this system are rising fast.

Retailers estimate the overall effect to be about 25 to 30% in market prices in 2017 to date. It is impossible to understand how the official figures for inflation are being calculated.

However one looks at it, if present trends continue we will be back in hyperinflation territory by the end of the year.

Cross is an economist and MP for Bulawayo South. These New Perspectives articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES). Email kadenge.zes@gmail.com and Cell +263 772 382. 852.

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