Understanding the Zimbabwe Economy

I often say to visiting experts and diplomats, that if you say you understand Zimbabwe, you have not been here long enough. We are a tiny blip on the global radar but we punch well above our weight and are in fact a very complex and difficult to understand economic and political entity.

Eddie Cross

On the economic front many experts who have responsibility for interpreting our situation are most often astonished as to how we actually survive, given the crazy decisions we have had to live with over many years. Just take the era of the Ian Smith regime from 1964 to 1980. He declared Independence from Britain in 1965, against the advice of just about everyone except his political acolytes. That was followed by the toughest sanctions regime ever imposed by the UN Security Council and then a civil war involving the struggle for equal rights and democracy by the majority of our people against the minority Government of the day.

Yet, at Independence in 1980, the economy that the new leaders took over had a national debt of just US$700 million, a currency that was worth two US dollars, virtual self-sufficiency in all basic consumer goods with food prices at export parity and well below regional levels and virtually no inflation. How was this achieved? I defy traditional analysts to explain how the Rhodesians achieved this state of affairs, even the President of Tanzania said to Mr. Mugabe, “You have inherited a jewel of Africa, do not mess it up!”

Then twenty years of determined activity to provide health and education to the great majority. By 1990 Zimbabwe had the highest rate of literacy in Africa. In the first five years after Independence, we built a new school every day. We built a modern hospital in every District with a national network of referral hospitals and 1600 basic health centres. In this frantic effort we had the support of the world and it was partly funded by the international community. But we also borrowed money. By 2000 we were heavily in debt and were forced to default on our international obligations. Over those 20 years we ran a fiscal deficit that averaged 8 to 9 per cent per annum – completely unsustainable in the long term and disastrous in an economy that was not growing strongly.

With a leadership that was not being renewed by fresh blood and was tired and aging, Zimbabwe gave in to the pressure from the Veterans of the War and also went into the Congo to support the takeover by Kabila. The costs crippled the country and faced with the first default on debt, the international community began to isolate the regime financially. These restrictions were intensified when the Mugabe regime lashed out at the opposition and took action to protect its grip on power. Financial isolation morphed into sanctions.

Even so, it was not the sanctions that crippled the country, but decisions by a rogue Central Bank that desperately printed money in an effort to prop up the Regime. In an effort to cut off support by the farming community for the opposition, the Government crippled the commercial farming sector and nationalised private land without compensation. Production collapsed by 70 per cent. The domino effect did the rest and by 2008, Zimbabwe was virtually a “failed State”. One third of the population fled the country, two thirds of whom were left was being fed by the international community, domestic industry virtually shut down – our markets were empty and our filing stations for fuel, dry. Eventually regional States stepped into the ring and forced the warring Parties in Zimbabwe into a Government of National Unity.

Four years of relative sanity followed. The formal economy bounced back with economic activity expanding by 70 per cent per annum. Inflation fell from hyperinflation levels in 2008 to minus 7 per cent in 2009. I ran a business right through this era – looking back even I cannot tell you how we survived. It was a daily struggle.

When regional States took their eye off the ball in 2013, the Mugabe led regime returned to power and went back to business as usual, as if they had learned nothing from the previous 33 years. Zimbabwe found itself back in a mess by 2017. Inflation rising, a vastly over valued local currency, a fiscal deficit that reached the point in 2017 where 40 cents in every dollar spent by the State was borrowed or printed. It was a step too far and in November of that year, the Military stepped into the ring and forced Mr. Mugabe to resign and hand over to his long time adjutant, Emmerson Mnangagwa.

In 2018, after winning the next general election, the new President appointed an internationally known economist, Mthuli Ncube, as his Minister of Finance. At last we had a person at the helm of our economy who understood the fundamentals. He crafted a program he called the National Stabilisation Programme which was designed to guide us to the end of 2020. Under this programme he introduced a new domestic currency. Floated it to diminish its value in line with the fundamentals and imposed tough controls on State expenditure. The cost of State salaries fell from 97 per cent of revenues to 40 per cent, the fiscal deficit was eliminated in two months and with a very much reduced value of the local currency, exports began recovering and imports declining in line with the steady recovery in local industrial production. By the end of the program, we enjoyed fiscal and monetary stability, something we had not really had for perhaps 60 years.

The business community, bruised and battered by their experiences over many years, had no confidence in the new regime. They had been crushed too many times in the past. They felt there was no rule of law, property rights were not in any way sacrosanct, the value of their businesses and their accumulated capital stock had been wiped out so often that they only trusted external currencies to protect value. Even after getting so many of the fundamentals right and creating a measure of stability and predictability, they remained deeply suspicious of motive, intent and the sustainability of the new dispensation.

But as we look into the next few years we need to recognise the following facts:

Inflation is at last coming down to more normal levels and if we can maintain discipline, by the end of 2021 we should be down to where we need to be at about 5 per cent per annum.

For the first time in many decades we are earning more foreign currency than we are spending and have domestic reserves. The Treasury has a significant surplus of local currency and now quite significant reserves of foreign currency in its own accounts. Private and corporate bank accounts hold nearly US$1,4 billion – 90 per cent of it in the form of fungible holdings.

The domestic market is now fully supplied with everything that is demanded at market prices. These may be above regional levels, but at least they are in free supply. No shortages remain, especially in essentials. Even electrical energy is now more stable and available.

The foreign currency auction has many detractors, but in 2021, US$1,8 billion will be transacted on this market, another US$400 million will be sold by the Banks on the interbank market at the auction rates and US$3,8 billion will be sold by corporates and individuals from their foreign currency accounts. These transactions will make up payments for 96 per cent of all imports. The informal market for foreign currency, which in 2018 controlled the great majority of transactions at a substantial premium, is now relegated to a much smaller role used mainly to finance smuggling activity.

Are we there? By no means but goodness, what a start! Right now the indications are that a robust recovery is underway after the damage inflicted by the Covid related shutdown. Electronic transactions in local currency are running at Z$7 to Z$10 billion a day. Exports are growing at 20 per cent and imports continue to decline as our industries recover. Young people are returning to Zimbabwe from abroad and are bringing with them their exposure to global practice and a new energy. A massive building boom is underway that will consume 4 million tonnes of cement this year.

For the first time in many years, we are at last doing something right.

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