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Friday, 22 June 2007

Zimbabwe on the brink ...

“On Friday morning it was at Z$90,000 to US$1,” said a petrol dealer, who asked not to be named. “By lunchtime it was at Z$100,000 to US$1. At the end of the day it was Z$120,000 to US$1. By the time I’ve banked the cash, it’s lost its value and I’ve lost money. I’ve got fuel, but not for Zimdollars. I’m going to have to close my doors.”

After decades of reckless economic mismanagement – including an official policy of printing money as fast as it can be done – dictated by President Mugabe, Zimbabwe has lurched into hyperinflation in the past few months. Annual inflation in May was at 4,500 per cent, according to official statistics, which are regarded as very conservative.

A worrying extract from the Times Online article that reports that fuel supplies in Harare have all but dried up after service stations refused to accept the country’s wildly unstable currency in payment. It was reported last week that Zimbabwe has no more than six months before total collapse. It must be a different form of collapse in store because surely the economy has already collapsed. Zimbabwe is now a barter economy.


  1. From the BBC:

    Zimbabwe has 80% unemployment and independent economists say inflation is running at 11,000% per year.

    On Thursday, the value of the Zimbabwean dollar plummeted with black market exchange rates reaching 300,000 Zimbabwean dollars to one US dollar. The official rate is 15,000 to one.

    "I believe inflation will hit 1.5m% by the end of 2007, if not before," Mr Dell told the Guardian newspaper, adding that he believed this was a "modest forecast".

    This leads to a lot of questions:

    In an economic context, how do you know when there is a 'collapse'? What are the next steps to revive the economy? What are the experiences of other countries that have gone through this process?

    Zambia needs to be prepared what could be a very disrupting event.

  2. Touque,

    Thanks for bringing this to our attention!

    "In an economic context, how do you know when there is a 'collapse'?"

    This is billion dollar question!

    I believe this has already happened. But I am unsure what people are expecting by a collapse. From an economic stand point it seems that the economy is operating on a barter system.
    The concept of private property also seems to be eroded which guarantees exchange to take place.
    To all intends and purposes the sentence Zimbabwe economy is a contradiction in terms.

    What people are expecting is a "political collapse" I think. When people seize the initiative and remove Mugabe from power.

    "What are the next steps to revive the economy?"

    I think the economy cannot be revived until institutions are restored that guarantee exchange and rule of law. So that has to re-established.

    And then possibly adopt what the IMF has suggested. See here.
    They believe it is possible to bring normality if the Central Bank can be made to do its job. A turn around within a year is possible. But it could see a worsening in plight for the people unless it is also accompanied by aid. I think what we can safely assume is that Zimbabwe will get worse before it gets better even under a post Mugabe regime.

    "What are the experiences of other countries that have gone through this process?"

    This paper has examples of countries which have experinced higher rates of inflation (see Appendix Table 1). The table excludes Serbia's inflation which peaked at a monthly rate of 175,093% in the period Feb 1993 - Jan 1994.

    "Zambia needs to be prepared what could be a very disrupting event".

    I agree.
    This is something that the Government cannot discuss since it would be seen as precipitating a fall of a neighbour, but I hope they are thinking about it.

  3. Touque,

    Shortly after WWI, Germany's economy went into a hyperinflation spiral which eventually resulted in a circumstance where it was literally cheaper to burn cash for heat than other fuels. The Zimbabwean currency slide is actually worse than it appears, since they chopped off three zeroes in '06. Changes in the exchange rate over the last decade should therefore be viewed with the current conversion rate in the hundreds of millions to one, not hundreds of thousands to one.

    "What are the next steps to revive the economy?" Touque

    The Zim government has got to stop spending money they haven't got on price subsidies for parastatals and preferred producers. They keep trying to fix selected prices in place and ration limited items like fuel. The problem is that they buy the fuel overseas for what it actually costs, but they promised cheap fuel, so they buy high and sell low to the preferred players, while everyone else pays even more to compete over the remaining supply. Not only was the government losing money, they also pushed up prices to the point where farmers would make more money simply reselling their subsidized fuel on the open market than they could after months of growing crops which must be sold at similarly government mandated low prices.

    The way markets generally work is by letting producers measure the costs of inputs and price output to customers appropriately. The Zim government has instead tried to provide cheap inputs in exchange for cheap outputs in isolated bits and pieces of the market, without seeming to recognize that the whole market is always acting on every part of itself organically. When fuel prices go up in one part of the market, the other prices related to that part also go up (ie all of them eventually).

    Had they been flush with cash like China or Venezuela when they told the creditor community to stuff itself (it's easy to tell off the IMF when you don't owe or need to borrow any money), then maybe their experiments with market manipulation would not be so disastrous as they are. Since they were playing with borrowed money instead of a surplus, each mistake has compounded their losses. Like a compulsive gambler, the first thing they must do is step away from the table and accept their losses as final.

    Unfortunately the political climate in Zimbabwe does not seem conducive to admissions of error, therefore every policy failure is blamed on external actors, especially messengers bearing bad news. Without accurate feedback, no system can change in response to its environment, and the government in Zimbabwe needs to understand the effects of running the treasury printing presses instead of finding existing money within its budget.

  4. "Like a compulsive gambler, the first thing they must do is step away from the table and accept their losses as final."

    hahaha..very funny!

    A bit like a friend of mine who never likes to leave the chess table even when faced with a string of losses!

  5. Yakima,

    Shortly after WWI, Germany's economy went into a hyperinflation spiral which eventually resulted in a circumstance where it was literally cheaper to burn cash for heat than other fuels.

    It is important to remember that then too, the cause for hyperinflation was essentiall external. Germany was not allowed to recover from the war they fought to a standstill, and was even forced to compensate France for it's losses. Not that I'm feeling very sorry for Germany, but it set the stage for World War 2.

  6. MrK,

    The initial conditions which put stress on both governments were largely external (as with Serbia and Argentina, arguably less so for CIS countries), however it is also their common policy response to that pressure which allows high inflation to compound into hyperinflation. Ending hyperinflation will require a change in monetary policy. In the German example the eventual solution was to issue a new currency backed by the value of state-owned land and parastatals, and then to forbid interference with the new central bank.

    Currency is an odd social construct to begin with, and modern currencies are backed by "full faith and credit" of the State. It is important to remember that the Zimbabwean government has problems which examples like Venezula and China don't because it cannot support its own operations using its own revenues. In shrugging off the controlling hands of the international finance community, it has not entered a world of newfound independence, but rather the shadier world of printing inflation currency, selective bookkeeping, negative real interest on savings, and otherwise exhausting the resources of domestic banks and enterprises.

    If the government budget was being paid for out of normal tax and parastatal revenue streams, then they would not have this big of a problem. Yes, the external condemnations of and subsequent restrictions on Zimbabwe's borrowing and governance practices have made it very difficult for them, in every area in which their budget was dependant on external financing.

    Increased fuel prices have had a negative effect on industries in developing countries worldwide, but in most of those markets the company's add the fuel price to their prices and the consumers suck it up. ZANU-PF has apparently decided that they want to control the price of fuel, even though they don't produce any, which amounts to buying fuel at the market price and then relabeling it with a lower price that better suits their notion of fair. Such a subsidy is fine, the government must merely allocate funds from their budget to accomodate it.

    ZANU-PF is ambitious in its stated vision, and staffed by some truly commendable heroes of the liberation struggle. To quote the philosopher George Santayana, "To delight in war is a merit in the soldier, a dangerous quality in the captain, and a positive crime in the statesman." To me this caution applies to the manner in which ZANU-PF has been conducting itself in pursuit of that vision. Statesmen know to balance their vision on a rising groundswell of support and momentum in order to guide existing forces towards their goal. War, like chess, is more zero-sum in nature, where your loss is my gain, which is well oriented for the pursuit of liberty from external forces, but less so for a vision of growing prosperity and local community and economic empowerment.

    There is no incontrovertible reason why ZANU-PF could not continue its hegemony over the Zimbabwean ship of state and associated parastatal enterprises, but I think they will need to empower a new generation of talent whose background and style are oriented more on statecraft rather than war. The situation is bleak, and it will take a full admission and understanding of the costs of previous and present policy failures for the government to take its remaining resources and employ them in clear and transparent ways so as to restore the "full faith and credit" of the State and stop the currency slide.

  7. Yakima,

    Your analyis is brilliant, and I would agree with most of it, including price manipulation. Some of their responses seem very old school communist.

    However, we must also take into account the external forces that are denying the Zimbawean economy and state access to foreign currency.

    Oil and other fossile fuels are traded and sold in US dollars, so obviously a cutoff of foreign exchange would hit fuel prices directly.

    The Zimbabwe S. 494 [107th]: Zimbabwe 'Democracy and Economic Recovery Act' of 2001 clearly spells out which international banks are banned from lending or giving guarantees to Zimbabwe:

    International Bank for Reconstruction and Development
    International Development Association
    International Finance Corporation
    Inter-American Development Bank
    Asian Development Bank
    Inter-American Investment Corporation
    African Development Bank
    African Development Fund
    European Bank for Reconstruction and Development
    Multilateral Investment Guaranty Agency

    I think that is very much an external cause of their problems, and this has been going on since 2001. If they really believed that Zimbabwe was collapsing under it's own mismanagement, why would they need a ban from multilateral banks to expedite things?

    This is also why Zimbabwe must be helped, and why so many African heads of state are reluctant to condemn it or President Mugabe.

    This could happen to them (if it already happened as in the case of Zambia before 1991).

  8. Yakima,

    There is a tried and true tactic in combating currency that has been printed and causing hyperinflation - gather it up and burn it.

    One African president did just that - but I can't remember the name or the country (I think this was back in the eighties).


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