THERE is no shortage of superlatives to describe the state of the Zimbabwean economy. If statistics were to be believed, the country has the worst economy in the world.
But can it really get any worse when every economic indicator suggests we have hit rock bottom. Without a bold change in policy direction, the economic outlook remains bleak. The truth is, economic fundamentals can deteriorate further and inflation can still get worse. Zimbabwe’s inflation is hardly history’s worst – in Weimar Germany in 1923, prices quadrupled each month.
During hyperinflation in Yugoslavia, shoppers would use wheelbarrows to transport bank notes for a shopping expedition.
There is a certain surrealism associated with analysing the Zimbabwean economy; good news is as scarce as the US dollar. The impact of the economic collapse is felt on every street corner and by every business. The country has been in a deep recession and is experiencing hyperinflation for the last decade. The impact of both on ordinary Zimbabweans has been retrogression back to the Stone Age.
Besides breaking records as the country with the highest inflation rate in the world, it is the comparative difference with other top five countries rated on the current high inflation list which highlights the Zimbabwean problem like a sore thumb. The second highest inflation is in war torn Iraq, with an inflation rate of 53,2%, followed by Guinea 30,9%, San Tome and Principe 23,1% and Yemen at 20,8%. Economists say that it is a miracle that the Zimbabwe’s economy is still surviving with the unprecedented rise in prices and an unemployment rate of 80%.
So why is it that there are few, if any positive economic forecasts on Zimbabwe? Could this be part of the often-touted “neo-liberal plot by the West to sabotage the country?” The truth is that there have been few reasons to cheer. The Zimbabwean government itself is deeply torn and conflicted between an interventionist, command control policy prescriptive approach and a free market approach to economic policy.
This has been typified in contradictory policies such as the floating of exchange rates and the price controls or the high level fight against inflation but expanding quasi-fiscal activities thereby increasing money supply growth. The result has been a blend of less than austere economic experiments unsuccessful anywhere else in the world. Beyond the short-term need for political survival, the country’s economic model remains uncertain, if not non-existent.
On a balance of probabilities, weak policy formulation and implementation has been as responsible for the economic crisis as the “declared and undeclared sanctions”. It is possible to find sympathy with a school of thought which suggests that Zimbabwe has more of a “governance” problem than it has an economic crisis.
The recent rise in inflation has been entirely man made. Inflation surged between February, March and April following the sudden rise in money supply that flooded the economy to finance the 2008 election and the June 27 presidential run-off. Reflecting this increase, the money market is currently in a huge surplus, peaking at $15 quadrillion last week.
Unconfirmed reports indicate an increase in annual inflation from 355 000% in March 2008 to 732 000% in April and 1 700 000% in May. This translates to a monthly inflation of 224% in March, 314% in April and 261% in May which matches fundamentals on the ground. The late great Milton Friedman told us that inflation is always exclusively a monetary phenomenon.
The recent paralysing rise in money supply has been a major contributory factor to rising inflation. The central bank has never denied that it has been printing money to fund some of the country’s critical supplies. This indeterminate rise in Money of Zero Maturity is considered to be a reasonable proxy for watching the movement of M3, which is the broadest measure of money supply.
The huge rise in inflation has also in part been attributed to the depreciation of the Zimbabwe dollar on the inter-bank foreign exchange markets. Since the floatation of exchange rates, the Zimbabwe dollar has been depreciating by an average of 20% daily due to sustained pressure on an unsupported market. The parallel market has been ferociously resurgent, with the interbank market playing catch up. Although the reasons for the dominance of the parallel market are varied, there could be other dynamics at play.
Often neglected is the fact that with industry utilisation at less than 10%, there have been little or no exports. Companies have also been discouraged from investing on the local market due to the general uncertainty about the future values of their currency holdings or investment portfolio which in turn leads to low levels of employment and economic growth. The market for “free funds” often from people in the diaspora sending money to their relatives has become the major source of foreign currency. Currently, exchange rate tends to be driven by money transfer rates than by the semi-liberalised interbank market.
Addressing the country’s economic problems will not be easy but a turn-around is possible. The central bank has introduced a couple of good policies which have gone unsupported by business due to polarity or simply contradicted by politicians in aid of political rhetoric. The liberalisation of the foreign currency market is one such policy.
By Lance MambondianiÂ
Lance Mambondiani is an investment executive at Coronation Financial plc.