Zimbabwe’s Failed Economy

Zimbabwe an economy crippled with bad economic policies, poor governance, an increased public sector wage bill, company closures, fiscal imbalances, alarming unemployment rates, an ailing production sector, meagre direct foreign investment, an unstable financial market, collapsing business activity and poor forex receipts, operating on a shoe string budget naturally has  challenges in meeting its macro-economic objectives.

While the commercial banking sector runs dry the black market of the Zimbabwean economy is flourishing. This is a cause for concern from an economic point of view. The Zimbabwean economy suffered a hyperinflationary environment in 2008 with inflation hitting which resulted in its listing on theHanke-Krus World Hyperinflation Table. The largest worthless note was the $100 trillion bill. The black market (Harare’s Road Port) proved to be an efficient bank of last resort from that point onwards in providing a number of foreign currencies which in itself was a mockery of the Reserve Bank of Zimbabwe’s (R.B.Z) operations.

The R.B.Z introduced a surrogate currency, the bond note, in a bid to solve the crisis. This was  unsuccessful. The bond notes were extremely scarce and fell in value. This is highly questionable since one attribute of the value of money is scarcity with scarcity enabling the retention of value, however, the opposite was the case with the RBZ’s bond note. This surrogate currency has proved usable domestically, with the exception of the flooded Mozambique parallel market. The transactions conducted in Mozambique are mainly for the purchase of bales of second hand clothes. Interestingly, the Zimbabwean government banned the importation of such bales recently, with the result that a lot of workers have been retrenched forcing them to resort to self-employment activities which are prohibited by the state. This then becomes a guaranteed cycle of poverty.

To curb this cycle, there is need for fiscal consolidation to restore policy credibility and economic stability. Increases in public debt has crowded out private sector activity, aggravating liquidity shortages, and exacerbating debt distress.  This led to the central bank acquiring  $3 million worth of bond coins from a South African company after initially it had close to 175 million dollars worth of its surrogate currency in circulation. With a lot of money in circulation coupled with low production capacity, fears of demand-pull inflation can be felt in the economy. However, although the printing of the bond notes is backed by African Export-Import bank, a US$200 million facility, there are possibilities of future tax implications for Zimbabwe’s citizens as bond notes are, in and of themselves, an implicit tax and a future liability for resident citizens as the underlying debt has to be paid to African Export-Import Bank upon expiration. This may result in an increase in taxation in the future or the government reducing expenditure.

The introduction of this surrogate currency has brought about positive and negative effects to the general populace. Negatively, prices of goods increased and, more significantly, many shops and retail outlets do not accept the currency as legal tender . This creates difficulties for ordinary citizens to conduct transactions. Secondly, there is a reduction in import volumes into Zimbabwe as this currency is only usable locally meaning that the importation of raw materials and other products needed by the manufacturing sector is impossible, unless companies or importers approach commercial banks so as to access foreign currency. This resulted in a loss of investors and foreign direct investment which was felt across the economy. For example, investors wanting to inject $54 million for a bus interchange in Harare pulled out once they heard of the introduction of this currency by the Reserve Bank of Zimbabwe thus contributing to negative economic growth.

Positively, transactions using plastic money were recorded at 70% in the retail sector. This implies that an ease of doing business was achieved as cash shortages resulted in an increased use of plastic money. This also reduced incidences of theft of cash as more people use plastic money.  To drive the economy forward it is essential for the policy makers to implement supply-side policies that resuscitates and revives the industrial sector in addition to attracting foreign direct investment. Instead of printing more money with African Export-Import Bank, which has future tax implications, it may be advisable for the economy to adopt the South African Rand to ease the financial crisis and restore investor confidence since the Rand is relatively stable.


Featured image | $100,000,000,000,000 : Adam Selwood | flickr

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of The Best of Africa.

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