An upside-down economy

Harare - Nearly 90 percent of Zimbabwe's currency is kept outside of the banking system, which, analysts say, illustrates that the parallel market is the driving force in the economy, while the formal sector withers.  Far-reaching currency reforms, instituted this month by Reserve Bank gover


nor Gideon Gono, were aimed at redressing the imbalance between the two sectors and reining in hyperinflation, hovering around 1,000 percent.
Gono said recently that of the about Z$40 trillion of old currency in circulation, only about Z$5 trillion, or 12.5 percent, was passing through the banking system. The remainder was in the parallel market. The central bank introduced a new currency to replace the old denominations at a new exchange rate, forcing people to return cash hoarded at homes, offices and outside the country to the formal banking system.
Gono set an August 21 deadline for exchanging old currency for new, and also adjusted the official exchange rate from Z$250,000 to one US dollar to Z$250 to one dollar. The sting was that individuals could only exchange Z$100 million daily, in a window period that allowed a maximum of Z$1,6 billion to be exchanged before the new currency comes into effect. The reforms were launched in tandem with nationwide roadblocks, manned by the police and youth militia of the ruling Zanu (PF) party, who confiscated money from individuals carrying more than Z$100 million. A Reserve Bank statement has claimed that the operation, in which airports, companies and homes were also searched, has so far recovered Z$10 trillion, or a quarter of the money in circulation.
Isaac Kwesu, an economics lecturer at the University of Zimbabwe’s Graduate School of Management, said the parallel economy, which consisted of the black market and informal trade, was what maintained the economy.
“The parallel economy now underpins Zimbabwe’s survival. The black market in particular has been flourishing over the years, and this has been made possible by the ever-shrinking formal market, due to reduced productivity in industry and in agriculture, shortages of foreign currency and a steep decline in investment,” Kwesu said.
“Informal trade and the black market have been growing, owing to the economic problems the country has been facing for a number of years now. It has been easy for the two to take root, because they normally do not require a lot of money to start and they can easily be managed,” he said. Although parallel economies are difficult to quantify, economist and former president of the Zimbabwe National Chamber of Commerce (ZNCC) Luckson Zembe said the amount of money outside of the banking system was a useful indicator.
 “As the Reserve Bank has said, more than 50 percent of the money has been circulating outside the country. If you add to that the amount that is in informal trade and the local black market, you could safely say upward of 80 percent of the money is driving the parallel economy,” Zembe said.
Zimbabwean bearer cheques have been used as cash since 2004, and are found in large quantities in Mozambique, South Africa and Zambia. Unregistered foreign-currency dealers based in these countries do business with cross-border traders, so they can buy goods to trade in Zimbabwe when they return.
Cross-border trade has been on the rise as the economy has declined. The fast-track land reform programme that began in 2000 and led to the seizure of white-owned farms resulted in aid cutbacks and stringent borrowing measures being imposed by international financial organisations, such as the International Monetary Fund and the World Bank.
The economic shock was compounded in 2003 when a widespread shortage of cash in banks eroded confidence in the banking system. The combination of these factors, including the disruption of the agricultural sector, a major foreign currency earner, coupled with President Robert Mugabe’s alienation of the West, brought a crippling shortage of foreign currency, basic goods and hyperinflation.
Analysts say the rapid growth of the informal economy has been counter-productive, because the money generated is used mainly for consumption rather than development. “The parallel economy is not concerned about the building of schools, hospitals or the setting up of infrastructure that the majority of the people can benefit from. Instead, it creates a dangerous situation, because those who are involved in it do so for self-enrichment,” said Zembe.
“Policy planning becomes difficult because the activities in the informal and black markets are not recorded, while people speculate and push inflation up, in addition to the creation of artificial shortages of foreign currency, basic commodities and industrial inputs,” he commented.
Mugabe has publicly backed Gono’s monetary reforms, but the measures have angered the poor, the middle-class and members of the ruling elite. Independent economist James Jowa recently alleged that most “corruption taking place, like market manipulation and forex deals, were done by the ruling class.”
Economic analyst and former member of parliament for the Movement for Democratic Change (MDC), Tapiwa Mashakada, said companies were being compelled to withhold large sums of money in order to remain viable.  “It does not make sense to say all the money that the Reserve Bank prints should be found in banks, because individuals and companies need to use it, but because of hyperinflation, they do not have a choice but to keep large amounts for regular transactions. After all, banks tend to limit the amount of money that can be withdrawn on a daily basis,” Mashakada said. – IRIN

Brain drain gathers pace
Price hikes spook Govt

Post published in: Economy

Leave a Reply

Your email address will not be published. Required fields are marked *