September 4, 2008.

MUGABE’S PROBLEM: THE CRUMBLING ECONOMY

On August 25, 2008, a new historical script was written when ZANU (PF) was defeated in Parliament by the leading Movement for Democratic Change led by Morgan Tsvangirai despite trying to strike a coalition deal with MPs from the smaller MDC group led by Arthur Mutambara in a fierce battle for the post of Speaker of the House of Assembly. This dealt a heavy blow to Robert Mugabe and ZANU (PF). After having been defeated, Mugabe was further subjected to humiliation by jeering opposition MPs the following day while he was opening Parliament.

What the unprecedented events of August 26 so clearly demonstrated is that the mould has been broken. Mugabe is no longer the icon the nation worships. Zimbabweans endured three months of brutality and bloodshed designed to reverse the nation’s will. Many lost members of their immediate family and colleagues. The jeering MPs are the survivors of the most vicious campaign since Gukurahundi. And Mugabe in his speech tried to suggest the body mutilation and killings were isolated incidents. It is understandable that the MPs took the opportunity to express their anger and contempt for their oppressors.

Since losing both the presidential and parliamentary elections on March 29, ZANU (PF) has been trying all tricks in the book to swallow the MDC like it did with PF-ZAPU in 1987. The Memorandum of Understanding signed on July 21 was one of such projects that were added to the political violence. The other has been the banning of NGOs that distribute much needed food relief to the population suffering the effects of the fast-track land reform programme. Analysts say the number of victims of the ban on NGOs that distributed food during the campaign for the June 27 presidential run-off would never be known as Zimbabwean rural areas were not accessible to humanitarian workers due to violence.

And then these antics were followed by the arrest of MDC MPs. It is unprecedented in a democracy that MPs are arrested at Parliament!

Still apparently rattled by the jeers with which the opposition drowned out his ceremonial opening speech, Mugabe said at a luncheon he was proceeding to form a new government excluding the MDC, a move which would compound the political impasse at the heart of the economic meltdown. In violating the conditions of the MoU, Mugabe would have a torrid time trying to govern without a majority in Parliament. However, his main problem really is the crumbling economy. Mugabe needs a political settlement in order to resuscitate the comatose economy.

Robert Mugabe is notorious for being stubborn, especially if he is put against the wall. With the present sweeping powers he enjoys, if Parliament blocks his proposed laws, he would choose to abandon his legislative agenda and resort to the Presidential Powers (Temporary Measures) Act which empowers him to make regulations dealing with situations that have arisen or are likely to arise and require urgent attention. However, the problem is that the Act only allows him to introduce measures that last for six months.

Analysts have suggested that Mugabe can declare a state of emergency, but this would not help because it would only be able to suspend certain provisions of the constitution mainly relating to the Bill of Rights, not Parliament. Constitutional lawyers agree that the real problem in terms of Parliament would be when it comes to the passing of a budget. In the event MDC MPs block the budget, Mugabe would have no option but to dissolve Parliament. However, this would further complicate matters because if he dissolves Parliament his term of office also comes to an end at the same time in terms of the current constitution as amended.

The economy has deteriorated further since power-sharing talks were suspended with prices of all goods and services increasing astronomically. On 21 August, for example, a 500 ml packet of Chimombe milk cost Z$40 (400,000,000,000 old currency). By August 29, the same packet was going for Z$115. Some vendors were charging Z$130. That is an increase of some 200% within a week.

Commerce and industry operations are depressed as the dollar continues to lose value against major trading partners. In the final months before the Reserve Bank of Zimbabwe’s reforms of April 30, 2008, virtually all popular currency conversion resources relied upon the official rate of Z$30,000 to US$1 for published figures, in spite of the vast differences between that and free market rates. By July 31, 2008, the official rate to US$1 was Z$69,484,070,056.18 as compared to the parallel market rate of Z$510,000,000,000.

The primary drivers of such distortion may be cash shortages or the various limits on state sanctioned forex transactions, which for private parties, must be handled via transfer instead of in cash for values beyond US$150.

RBZ Governor, Gideon Gono, announced on July 30, 2008 that the Zimbabwe currency would be redenominated by removing 10 zeroes effective August 1, 2008. Thus, On August 1, 10 billion Zimbabwe dollars were reduced to one dollar. By August 29, the official rate to US$1 was Z$34.83 as compared to the parallel market rate of Z$1,780. What this means is the cost of a US dollar rose by more than 1,200% in August against the depreciating Zimbabwean dollar. Before ten zeroes were removed, the parallel market rate was about Z$1.3 trillion.

It should be recalled that in June 2006, the regime decided to knock off three zeroes from the currency. Economic analysts have always maintained that the banknote crisis could only be resolved through sound economic policies, not piecemeal measures such as deleting zeroes and printing more notes. These measures will always fall short of resolving the issue.

The crash of the dollar against major currencies has eroded the purchasing power of consumers who are already reeling from high prices and shortages of basic commodities. The situation has become so bad companies and individuals are buying foreign currency as an investment tool to hedge against inflation. Apart from the fall of the dollar on the parallel market, there is a state of collapse of certain systems like water, sewage reticulation, telephone network, power and healthcare amid growing record unemployment that has driven millions over borders and strained regional economies.

The increasingly worthless local currency is ceasing to be an instrument of trade, with foreign currency becoming the major currency preferred in what economists describe as total ‘dollarization’ of the economy. The government’s belief that complete acceptance of its regulated official inter-bank exchange rate would help bring inflation under control has amounted to no more than a shallow attempt to deny the existence of the distortions, imbalances and scarcities that their policies have caused.

Therefore, the ultimate goal for any incoming administration should be to effectively unify the official and parallel market exchange rates and ensure some predictability in the foreign exchange market.

Apart from demand and supply, the direction of the movement of the dollar has been triggered by skewed policies by the government, the Reserve Bank buying foreign currency on the parallel market and availability of fuel.

Commerce and industry were clinging to the hope that a positive outcome of the power-sharing talks would signal the turnaround of the economy. It is apparent that the ZANU (PF) government has failed to solve the problem of electricity, fuel and foreign currency shortages. Zimbabwe’s urban residents, commerce and industry, mining and agricultural sectors are grievously prejudiced by interruptions in electricity supplies. This has brought the productive sectors to a standstill with the result that the economy has shrunk by 60% within a decade.

The country urgently needs balance of payments support since it does not have the capacity to generate enough foreign currency and this is where an international rescue package will play a big role in the event of a positive outcome in the democratic processes being negotiated. There are many donors ready to help Zimbabwe get back on track. According to reliable sources, the European Union’s economic recovery package to Zimbabwe could reach €50 million (US$72.2 million) should the on-going talks bring out an “acceptable outcome” by the three negotiating political parties. These funds would be for “food security, agriculture, public health, governance and support to civil society”.

”The EU’s willingness to provide support would depend on a satisfactory outcome to the power-sharing talks,” an EU official was quoted as having said. “It (EU) has no preconceived ideas on what an agreement should contain; that is for the parties to decide.”

Business appeared in better shape in expectation of a resolution in the political stand-off. The talks were suspended when opposition leader Morgan Tsvangirai refused to sign the document which left executive powers in Robert Mugabe’s hands. The MDC complains that there is no power-sharing reflected in the final document.

Rebuilding Zimbabwe’s economy will be an immensely difficult task, one that will take decades, even with accountable leadership and a high degree of social consensus. Zimbabwe’s economy has contracted continuously for the past decade, and this year is likely to be the worst yet, with the economy likely to decline by more than 10%. Investment is minimal, the middle class barely exists any more, and the skills lost because of the huge brain drain are unlikely to be regained soon.

Far-reaching structural reforms are needed to sort out the parastatals that now control large swathes of the economy and to sort out the land issue. Donor agencies are likely to impose stringent conditions. However, whatever transitional government that emerges after the present negotiations between ZANU (PF) and the MDC, there will have to be tough decisions. The most urgent of these is to bring down inflation running at 11 million per cent according to official figures but believed to be over 40 million per cent according to independent economic analysts.

Money supply remains one of the biggest hindrances to the lowering of year-on-year inflation. The government’s huge appetite for cash has spurred increased money printing, pushing money supply growth. Considered an important instrument for controlling inflation, money supply growth continues on an upward trend.

On June 27, 2007 it was announced that central bank governor, Gideon Gono had been ordered by Robert Mugabe to print an additional Z$1 trillion to cater for civil servants' and soldiers' salaries that were hiked by 600% and 900%, respectively. On July 28, 2007, it was reported that Mugabe had said that Zimbabwe will go on printing money if there is not enough for under funded municipal projects.

On August 30, 2007, it was reported that an additional Z$3 trillion had been printed to pay for 500,000 scotch carts and 800,000 ox-drawn ploughs plus an unspecified number of cattle that Mugabe distributed to ZANU (PF) cronies, service chiefs and judges who received expropriated commercial farms.

On November 24, 2007, it was reported that money supply was now Z$58 trillion re-valued currency (US$41 million at parallel market rates). However, Zimbabwe banks could only account for Z$1 to Z$2 trillion of those dollars, meaning that members of the public were holding between Z$56 and Z$57 trillion in cash. Gideon Gono was on record accusing what he called “cash barons” (speculators in high places) for hoarding the local currency.

On January 4, 2008, it was reported that money supply had been increased by Z$33 trillion (to Z$100 trillion) re-valued currency. Furthermore, the demonetization of the Z$200,000 bearer cheques was put on hold, thus increasing the money supply.

On January 21, 2008, Gideon Gono reported that money supply had been increased to Z$170 trillion since the middle of December. Furthermore, Gono expected it to reach Z$800 trillion by January 28, 2008.

Government domestic debt increased by 7,417% from Z$10.5 quadrillion as of April 1, 2008 to Z$ 790.6 quadrillion, as of July 15, 2008. This is financed mainly through borrowing and money printing, thus, fuelling money supply growth and inflation. Unless the new government Mugabe proposes to install comes up with alternative financing strategies, the risk of continued hyperinflation is likely to remain very high.

Zimbabwe needs to turn a new leaf and yet it appears Mugabe would rather remain in power fully cognisant of the fact that he has run out of steam and the country will be better served if he were to take a back seat. The mediator in the Zimbabwean crisis, South African President Thabo Mbeki, does not seem to understand that international donors would not support a new government in which Mugabe or ZANU (PF) still had a big say in policy as he tries to retain a prominent role for Mugabe in a new government.

Arm-twisting Morgan Tsvangirai into signing the present document which leaves Mugabe with his sweeping executive powers won’t solve Zimbabwe’s socio-economic problems.

It will take many years for the ruined Zimbabwean economy to recover, even if a political settlement is reached and a credible government espousing sensible policies takes over the country. Most skilled Zimbabweans who have fled the country (including white farmers) would probably never return, at least not as owners. As a result, it can be predicted that it would take at least 10 to 15 years to regain the 1998 per capita income levels and about 20 years to get back to where the economy would have been without the downturn of the last decade. Zimbabwe would have to discover a new economic model in which mining, tourism, construction and financing would be dominant.

A number of factors have accounted for this precipitous decline in the country’s economic fortunes. One of the main factors is bad economic governance perpetrated by Robert Mugabe and his henchmen. Excessive government spending and a series of wrong policy choices, such as price controls and fixed exchange rates, have crippled the productive sectors.

Chronic fiscal indiscipline is the other main factor. Rather than take steps to correct policy failures and institutional weaknesses, the Mugabe regime has run substantial ongoing budget deficits. The deficits are primarily financed by the Reserve Bank of Zimbabwe, which injects money for patronage purposes at extraordinary rates.

There is also the failure to uphold the rule of law, which has created chaos and uncertainty, resulting in the erosion of business confidence, leading to the misallocation of resources and depressed economic output. This has been particularly worrying in relation to corruption and land ownership.

In addition to creating a litany of economic woes, these factors have also stymied prospects for peace. Bad governance has fostered a culture of impunity and helped reinforce the political and economic muscle of the regime’s leadership.

A group of ZANU (PF) long-time loyalists and ruling-party insiders has become deeply vested in the status quo. The group of loyalists includes Emmerson Mnangagwa, a potential successor to Mugabe and an alleged architect of the country’s post-election violence; the Joint Operations Command (commander of the Zimbabwe Defence Forces General Constantine Chiwenga, commander of the Zimbabwe National Army Lieutenant-General Philip Sibanda, commander of the Air Force of Zimbabwe Air-Marshall Perence Shiri, Police Commissioner-General Augustine Chihuri, CIO Director-General Happyton Bonyongwe and head of the Zimbabwe prison service Retired Major-General Paradzai Zimondi); and other senior government officials. These people have demonstrated a capacity to do whatever it takes to maintain their privileged positions, which guarantee unfettered access to wealth and power — at the expense of the vast majority of Zimbabweans.

Amid tightening sanctions from the United States, Europe Australia and now Canada, even the president is struggling to maintain his traditional web of patronage; in particular the soldiers who have helped enforce his rule. The regime, which has a regular army of 35,000, is facing massive food shortages in military barracks.

There is a public perception that Zimbabwe is now effectively under the control of the Joint Operations Command, which masterminded Mugabe’s political survival after his shock defeat on March 29.

Zimbabweans have given serious thought to accountability during the transitional period. At a conference in Johannesburg in 2003, representatives of Zimbabwean civil society and international experts agreed on the importance of creating a truth commission to examine the actions of national institutions and authorities extending back to the era of white minority rule.

During that political transition, reconciling Zimbabwean society with itself will require a series of coordinated steps. A society may document the wrongdoings of the past, as a truth commission might seek to do, and also punish the worst violators of human rights, as its judicial system might do. But if it did not prevent abuses from reoccurring, it would not have secured justice.

It is essential to pay attention to democratic values and processes so as to prevent the creation of conditions for later injustices. Zimbabweans need the support of the region and the continent as they prepare for a transition that can bring justice, stability and peace.