ZIMBABWE REPORT
18 July 2007
Instead of the usual global report, maybe we need to have a look at our closest neighbour and see where this is heading. There's been some speculation that the Zimbabwean dollar will be replaced by the rand in a plan to save the collapsing Zimbabwean economy. Let's look at the root causes of the Zimbabwean hyperinflation, and then at the viability of the "plan".
What Zimbabwe's inflation rate is, is anyone's guess. The official annual rate stood at more than 3 700% in April, but the International Monetary Fund (IMF) economists say it's likely the official figures by far understate the true situation. The result of the hyperinflation is an economy that has ceased to function.
The root cause of the Zimbabwean crisis emanates from one thing (other than the total debauchery of it’s controlling party) - the Zimbabwean government is printing vast amounts of money to finance deficits. That means that government spending is being financed by the central bank's printing of money, instead of by taxes and/or the nation's savings.
In other words, the Zimbabwean economy hasn't been producing enough to generate the resources needed to pay civil servants' salaries and other government spending. Zimbabwe's gross domestic product (GDP) is too low (and has been for some time) to support its government's fiscal stance.
Too much money chasing too few goods
What happens if government spends close to what the country produces (its GDP)? Where does all this government money go if there aren't enough goods? And what occurs if this happens in a country where there's a shortage of foreign exchange, so the country can't really import the things that it isn't producing?
The answer is simple: there will be far too much money chasing far too few goods. And that - as night follows day - leads to hyperinflation. The situation is made worse by the fact that there's been a drought this past summer, which has exacerbated food shortages. But more importantly, farm seizures a few years ago triggered a collapse in agriculture, depressing the country's GDP and reducing its ability to earn foreign exchange.
Funny, though, that all this hasn't stopped President Robert Mugabe from spending as if there's no tomorrow. He has kept a bloated civil service in his pay, and is using some of these "public servants" as thugs to enforce his own strategy against inflation.
Money illusion
Money-printing is the easy way out for a man in a corner. It explains why Mugabe hasn't tackled the hyperinflation problem in the only way that he should: by cutting government spending drastically, because if he did, it would mean sacking all of his loyal thugs. By continuing to print money to pay his bullies, he creates a "money illusion" - the civil servants think they have something of value because they have Zim dollars and are inspired to go out and arrest shop-owners.
A working paper by IMF economists earlier this year put the effective fiscal deficit of the Zimbabwean government at 80% of GDP in 2006. Some analysts are now saying that the deficit - the shortfall between revenue and spending - is now actually more than GDP.
The IMF economists argue that much of the most recent fall in GDP can be ascribed to the appearance of hyperinflation. But "the initial output collapse is widely attributed to the chaotic seizure of commercial farms "the backbone of the economy", they say.
So what happens if the Zimbabwean dollar is replaced by the rand? Or if - as some reports have it - the Zim dollar is pegged to the rand? Both effectively amount to the same thing - a massive rand-based bail-out by SA.
Over his dead body
Does that mean that SA will print rand’s to finance Mugabe's thugs? What a thought! I don't think I exaggerate when I say that will happen over Trevor Manuel's dead body. I can't see the finance minister agreeing to a bail-out without some agreement from Zimbabwe that it will curb its fiscal excesses.
The only way in which a bail-out on such a large scale would happen is if Mugabe agrees to turn off the printing presses. And would he do that, knowing that his thugs would probably then turn their backs on him?
Another point is that a rand bail-out of Zimbabwe doesn't change the fact that there are shortages in that country. If Zimbabwe then uses the rand’s to import fuel from us, it just means our fuel import bill will be higher. The same goes for our food prices. However, the effect won't be huge, as the Zimbabwean economy is much smaller than ours. Yet there's a principle at stake. Why should SA foot the bill for the destruction of the Zimbabwean economy by Robert Mugabe?
Pain before the gain
The so-called plan to save Zimbabwe can only work if Mugabe agrees to (a) stepping down and (b) whoever takes over agrees to cut back on government spending. But that's not all the Zimbabwean government would have to do. The IMF working paper outlines other measures too that would have to be taken, such as liberalising the foreign exchange market.
Though the IMF doesn't say this, to me it's clear that a comprehensive reform package will create some short-term pain before the big gains begin to show.
A prediction? We will see blood on the streets before this is over – hunger will override fear and the locals will start revolting against the system. There is also the risk is that the “haves” will be targeted, as there are still a number of people who do have access to food and fuel (and the clever one’s will probably have stockpiled food). I would not like to be sitting there right now ! However, Zim still has a lot to offer the world, and once they have got through this curve by whatever means, there will be huge opportunities.
Question is, how long does this take ?
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