After 15 years of harsh, UN sponsored sanctions and civil war, Independence came and Zimbabwe found itself with a Reserve Bank and a local dollar that was still worth 2 United States dollars. It was an amazing achievement in the circumstances and pointed to the superb Civil Service we had and the mature way in which they managed our fiscal and monetary policies.
The new Government was led by a Cabinet with more than half its number holding good PhD qualifications. Not least among these professionals was Dr Bernard Chidzero who was appointed Minister of Finance. For the first decade, the whole system held together, probably because the International Community poured aid and other forms of assistance into the country. The Mugabe Government, buoyed by the inflows and a recovering economy went on a spending spree – we built a school every day and a major Hospital every two weeks. Our school system went from 2 000 schools to 10 000. By 1985 we had 95 per cent of our children in primary schools.
But much of this was achieved with borrowed money. By 1997 we were heavily in debt and close to being unable to service our debt. Despite all these developments, our currency was still worth more than a US dollar. Then we broke the back of our economy by paying our War Veterans Z$3,6 billion that had to be printed. The following year we went one step further by entering the war in the Congo on the side of Kabila. That cost us US$500 million a year with 11 000 troops and much of our hardware deployed. It was too much and the currency crashed.
But our economy was still quite resilient. Agriculture had been growing at about 15 per cent per annum since Independence, our industrial economy still provided the great majority of our consumer needs and the Mining industry was starting to show promise. But the multilateral financial groups began to disentangle themselves from Zimbabwe. Then we had the start of the political war against the MDC. The State went for the 5 000 white farmers and drove them off the land, the agricultural industry collapsed in the next three years and this triggered a collapse of the wider economy and by 2008, we were virtually a failed State. But at its heart was a Reserve Bank which simply abandoned all advice and began printing money recklessly. By 2008 we had a 1 trillion dollar note alongside a 1 dollar note – insanity.
Inflation tracked the insanity and by 2008 we were seeing prices double every few hours. To survive Zimbabweans simply had to turn to international and regional currencies for trade purposes. Barter was even used. The GNU came into being in February 2009 and the Minister of Finance really did not have any choice. He made a speech in Parliament and announced that 6 regional currencies would now be legal means of exchange. He dismantled exchange control and price control and liberalised the gold market.
The results were immediate – inflation was eliminated, prices actually declined and within weeks you could buy anything you wanted in our markets and stores.
The recovery was dramatic – revenue to the State grew from just US$280 million in 2008 to US$4,3 billion in 2013. But we missed the fact that the domestic economy did not recover, we were still importing over 90 per cent of everything we consumed. Dollarisation had a cost but we had very low inflation and rising incomes and thought this was much better than what we had come from – not difficult.
Then we had a change of Government and the Mugabe led Party took back control with a two thirds majority in the House. Carte Blanche in policy terms. They immediately fell back into previous bad habits and not only resumed printing money but this time they called the stuff US dollars. By 2017, in just three years, we held US$23 000 000 000 in our Nostro Accounts. I remarked at the time that the key test was the Reserve Banks capacity to liquidate these huge balances with real dollars. I asked if I could bring $1000 to the Bank and get US$1000 in return, the answer was no! If they had, there would have been a queue outside the Bank kilometres long.
Then came the changes in Government in 2017/18. The Government that emerged in July 2018 included Mthuli Ncube, a professional Economist with real business experience. He stated immediately that his top priorities were to introduce a stabilisation program to get us through the legacy problems left behind by the Mugabe Government. These included: –
- An over valued currency and the massive balances in bank accounts of false dollars.
- A deficit in the national budget where 97 per cent of all revenues were being paid out to a bloated Civil Service and requiring that 40 per cent of all expenditure be funded by loans.
- A massive, unserviceable national debt that was strangling access to global financing.
He began by dealing with the deficit which was achieved in six weeks by a program to install discipline in Government, increased taxes and tough action on Civil Service employment and salaries. Then he separated the local electronic currency, the RTGS dollar from real US dollars in our banking system and allowed the former to float. The result was that our mountain of US dollars melted away until only a residue of about 15 per cent was left. But this gave us an undervalued local currency which was the main means of exchange. This together with the reforms introduced by the new Government restarted the economy.
Our GDP began to expand, domestic industry and agriculture began to grow, local products replaced imports and the export sector started to show real expansion, led by mining. Our balance of payments went from a massive deficit in 2019 to a surplus in 2020 and has remained there. But our monetary policy fell behind the reform program and they resumed printing RTGS, essentially to fund the purchase of hard currency and gold. This is highly addictive and in 2023 we finally felt the effect. The Bank printed Z$1,4 trillion in 12 months and our currency, once again, crashed.
Three weeks ago, the Parallel Market Rate (PMR) a euphemism for the real rate of exchange, touched 12 000 to 1. Destroying savings, incomes and forcing us to use the US dollar for exchange in most markets. The Government was forced to take radical action and this week we have seen convergence between the open market and the bank rate and a sharp strengthening in the local currency now trading at 6 000 to 1 or less.
Is this a tipping point? I think it is, for the first time the Government has shown that it understands the problem and what is needed to steady the ship. Let me just restate the fundamentals going forward. First, we need our own currency, second we need a real market for foreign currency which reflects the fundamentals and not sentiment and third, we need discipline by our monetary authorities not to print currency recklessly. Do that and we are away, I am just concerned that our own dollar might become too strong.
Eddie Cross
Victoria Falls, 30th June 2023