May 14, 2007.

LIVING ON BORROWED MONEY AND TIME

The woes and tribulations of Zimbabwe's economy are phenomena dating back to the country's first decade of independence in the 1980s. This is the period of the "protectionist socialist governance". It was logical then that the independence government needed to resettle returning refugees and provide jobs for those that had been deprived by colonial regimes in spite of their academic qualifications. Socialistic rhetoric was overtaken by political patronage, where the ZANU (PF) government found it expedient to create jobs for the blue-eyed boys and girls. Over the years, the government has spent tax-payer's money to support its system of political patronage. This has meant a bloated Cabinet with its deadwood that does not stimulate economic growth.

This situation, naturally, leads to a bloated civil service and very often faceless employees whose "salaries" are pocketed by those in control. The creation of quasi-government organisations and government-controlled corporations (parastatals) found political appointees with no academic qualifications in control of these enterprises. Under the guise of economic empowerment, some businessmen have acquired controlling shares in big businesses. A number of transactions of equities in privatised government-controlled corporations went through in which the same consortiums and people benefited from the sale of government shares in listed companies. It seems obvious that most of these businesspeople are feeding from Zimbabwe's deeply rooted political patronage system. For some of these people, it is not their acumen but their political connections and back-scratching relationships that have thrust them into company ownership.

Unfortunately, as the politically well-connected enjoy the sweet crumbs falling from the high table of political patronage, even banks, which should sit at the heart of any well-functioning economy, seemed to have been unwittingly drawn into this mess. Banks are channelling funds to politically well-connected businesspeople that run up large debts in somewhat misguided acquisition plans. Steeped in a deeply-rooted political patronage system, some banks which were rocked with insolvency were known to practise crony-capitalism - whereby they pump funds to politically well-connected businessmen who run up large debts in misguided expansion plans. In the process, a lot of aspiring businesspeople have largely remained unstuck with their business projects in their desk drawers overshadowed by this new breed of corporate predators.

An example that comes to mind is that of Strive Masiyiwa's Enhanced Communications Network (Econet). Strive Masiyiwa had to fight his case all the way through the courts because he was being denied a cellular telephone network licence for his refusal to be a bootlicker. After a bruising four-year battle between Econet and the government over the handling of the cellular telephone tender, the government was found wanting and asked to pay for the High Court costs.

The government's reckless spending, most of it to buy political patronage, is the single biggest cause of the country's poor economic performance. Against all advice by well-meaning investors and economists, the ZANU (PF) administration brands those urging it to embrace fiscal discipline and austerity as the enemies of the people. The huge national budget deficit run by the government year-in and year-out spawned chronically high inflation (2,200% in March 2007) which, compared to that of Zimbabwe's main trading partners, left a gaping difference, which is really the force driving the economy down.

One of the reasons for this state of affairs is that the ZANU (PF) government is known for its habit of bringing in unbudgeted outlays - the government's propensity to rely on borrowed funds is a big problem:

• Almost Z$5 billion was spent on gratuity and pension payments for ex-combatants in December 1997.
• There was an estimated Z$1.8 billion bail-out to holders of fraudulent Cold Storage Company bills issued by the collapsed United Merchant Bank in September 1998.
• By mid-May 1999, the country had spent at least Z$500 million of the unbudgeted public funds on the war in the DRC.
• At the end of April 2004 the government announced a package which would mean spending an unbudgeted Z$27.5 billion for the country's traditional chiefs.
• In June 2004 it was speculated that the government made an order of 12 Chinese FC1 fighter jets and about 100 military vehicles at a cost estimated at US$200 million.
• In November 2004, a Bill was passed to pay Z$300 billion to former political prisoners, detainees and restrictees who were incarcerated between 1959 and 1979. The government started to cough out Z$13 billion every month from February 2005 to meet the unbudgeted payments.
• The government started forking out Z$9.7 billion in monthly salaries alone to 66 senators who were elected in a controversial election on November 26 2005.
• There are unbudgeted wage and salary commitments reviewed at the beginning of 2007 - and another adjustment expected soon - in order to curtail work protests by a restive bloated civil service.
• Now the government wants to amend the constitution to increase the number of members of parliament from 150 to 210 and senators from 66 to 84 despite the fact that the House of Assembly cannot accommodate the numbers.

Statistics from the Ministry of Finance show that:

• the former Ministry of Lands, Agriculture and Rural Resettlement spent unbudgeted outlays in the sum of Z$4.2 million during the 2003 financial year;
• the former Ministry of Local Government, Public Works and National Housing - $Z1.2 million during the 2004 financial year;
• the Ministry of Justice, Legal and Parliamentary Affairs - Z$2.9 million during the 2004 financial year;
• the Ministries of Public Service, Labour and Social Welfare spent Z$3.7 without authority in 2004;
• Parliament was the biggest culprit, exceeding its expenditure by Z$2,641.42 in 2001, Z$17,899.98 in 2002, and by Z$3,222,268.19 in 2004.

The government's insatiable appetite to live on borrowed money has continued unchecked, worsening the size of the budget deficit, which it continues to fund through the printing of money.

Facts on the ground show that the government has run huge budget deficits of up to 20% of gross domestic product (GDP) since 2000, and has printed money to cover triple-digit hyperinflation. For 2007, the budget deficit was forecast at 17.6% of GDP. Although the government has said that the economy is on a recovery path, the country has been given the dubious status of having the fastest shrinking economy in Africa. Economic analysts warned that government's ballooning expenditure - almost entirely recurrent - was likely to force the central bank into running the printing press, stoking money supply growth and consequently worsening the inflationary environment.

Printing money to cover government expenditure goes against economic rules. The International Monetary Fund and the World Bank have advised that money printing should not be used to cover the central bank's economic losses and to fund government operations. In a Working Paper released on 25 April 2007, the IMF said the Reserve Bank of Zimbabwe (RBZ) was unsound to manage the levers of Zimbabwe's financial industry and would need to be recapitalised to regain the confidence of the banking sector. "The RBZ is making losses because of the costs involved in supporting government policy through quasi-fiscal activities and keeping the currency overvalued," said the Bretton Woods institution.

In 2005, the government needed Z$1.9 trillion to service domestic debt which was running at Z$14 trillion in November of that year. The increase in the public domestic debt is caused by repeated open market operations (OMO) undertaken to accomplish the two-pronged task of subduing stubborn inflation and raising funds to finance the government's budget deficits. The debt surge is a culmination of countless Treasury Bill (TB) tenders, which effectively transferred Z$2.205 trillion to insurance companies, discount houses, pension fund managers and other money market actors in the past twelve months to March 2005.

A mounting burden of interest payments on the domestic debt rose from Z$284 billion in December 2003 to $2.9 trillion in March 2005 and unless interest rates came down further - a feat quite unlikely, given the fresh buoyancy in inflation - the size of government debt would inexorably continue to balloon. Consequently, in April 2007 interest payments accounted for 70.3% of total debt or a hefty Z$904 billion. The interest payments were for treasury bills, most of which were issued to the market at rates of between 450% and 500% in 2006.

The domestic debt surged by over 600% to an unsurpassed high during the first three months of 2007, breaching the trillion-dollar mark for the first time since the country lopped off three zeros from its currency in August 2006. Statistics from the RBZ in April showed that total government domestic debt, excluding government deposits with the central bank, increased from Z$176 billion on January 5 to Z$1.313 trillion during the first week of May. The RBZ had extended a Z$29 billion loan to central government. Of course, the effect of increased direct borrowing from the central bank is to add to domestic liquidity and inflation.

Economic analysts say Zimbabwe's upsurge in domestic debt is a sign of a severe debt trap: the government is borrowing to repay its debts. Rather than financing ongoing and exhaustive expenditures, most of the funds were now being used for transfer payments and consumption purposes. Economic analysts also say the escalating domestic debt level was likely to seal the fate of the country's inflation rate this year, already projected to reach 6,000% by independent forecasters.

The absence of balance of payments support from offshore financiers has forced the government to aggressively rely on domestic bank sources for funding requirements, normally through costly Treasury Bill (TB) instruments, which have largely been short term. Of the new government debt stock, Z$330 billion was in TBs, which attracted a whopping Z$904 billion in interest.

Zimbabwe's involvement in the war in the Democratic Republic of the Congo (between 1998 and 2002) drained millions of dollars from the economy. The government's land reform program, characterized by chaos and violence, has badly damaged the commercial farming sector, the traditional source of exports and foreign exchange. Multilateral and bilateral lenders have withheld balance-of-payments support, and foreign credit lines have been lost by both the private and public sectors further reducing foreign exchange receipts and export capacity. Badly needed support from the IMF has been suspended since 1999 because of the government's arrears on past loans, which it began repaying in 2005.

External debt was estimated at US$5.26 billion in 2006. In that year, the external debt fell by 2.3% after the country paid a total US$169 million to the IMF, the Reserve Bank of Zimbabwe said in its annual report. This mainly reflects resource payments on public sector medium to long-term debt, particularly to the multilateral financial institutions. The government paid back a total of US$176.3 million in 2005, of which 95.6% (US$169 million) reduced the external payments arrears to the IMF to US$144 million as at December 2005, the central bank said.

Economic analysts say that it would take more than 24 years for Zimbabwe to clear its arrears. One of the most ghastly consequences of being in debt is that a country loses its economic independence. It finds itself being coerced to adhere to any and every suggestion and demand from the IMF and Western creditors.

Gross official foreign currency reserves for 2003 were estimated at US$175 million, which represent approximately one month of imports, while usable reserves were much lower at just under US$40 million. By August 2005, foreign currency reserves had gone down to three days' worth of imports. At the peak of its economic performance, Zimbabwe enjoyed an import cover of about seven months. Import cover in Botswana exceeds 28 years with its foreign reserves at US$6 billion. Zimbabwe's annual foreign currency requirements total US$2.4 billion.

Gideon Gono, the once celebrated bank executive and now a controversial governor of the toothless Reserve Bank of Zimbabwe, has proved beyond any measure of doubt that he is a political appointee serving the interests of Mugabe and his ZANU (PF) regime. He lacks the clout to stave off the country's current economic crisis until the old man makes his much awaited departure. It is actually now apparent that he has been sidelined by the politicians and they appear intent on making things worse.

Gono's futile attempts to lure foreign currency into the Reserve Bank's coffers were a dismal failure because the unrealistic exchange rates governing formal trade in foreign currency were so far removed from the real exchange rates that almost all foreign currency dealings were happening on the spurious informal market. At the end of last month (April 2007) the central bank governor devalued the dollar through the back door to raise money for food imports under what he called the Drought Mitigation Fund. The fund will allow holders and generators of foreign currency to change their US dollars at Z$15,000 at a time the parallel market is calling for more than Z$30,000. (The official rate is still Z$250:US$1.) Even though Gono insisted that this was not devaluation, economists interpreted the move to mean that the value of the Zimbabwe dollar had been knocked down by 98.3% and the market will use the new rate as the benchmark in all foreign currency transactions.

In this way, Gono and the government are left out of the foreign currency trade loop, powerless and most importantly with empty pockets, especially after emptying the nation's last foreign currency reserves to pay off their debt to the IMF. The governor's monetary statement or policy will have a disastrous impact on the economy as a whole as it will create massive distortions. The decision means that while the RBZ will buy foreign currency at Z$15,000 from individual dealers and exporters, it will be forced to sell at the official rate of Z$250. In economic terms, this means the central bank will be making a loss of Z$14,750 for every US dollar it buys.

Because of the scarcity of foreign currency, only the government and government-controlled corporations will get the foreign currency at Z$250. In other words, this means that the central bank is subsidising government-controlled corporations and government departments.

The power of the free market system lies not in the political policies governments formulate, but natural laws of supply and demand. To print more money to pay off international debts does not boost foreign currency into government coffers. Thus, the monetary policy announced will not satisfy the supply side of foreign currency because Zimbabwe is not exporting much. Tobacco, horticulture and tourism delivered a steady flow of foreign currency during the 1990s. This could be used to import necessities such as fuel and power. Today, those sectors are in disarray because of the chaotic land-reform programme. For example, tourism earned the country US$232 million in 1996, but earned US$61 million in 2003 in response to the assault and murders of white commercial farmers and political opponents.

Interactions in economic markets, compared with political policies, are far less responsive to government intervention, short of diktat, and will almost inevitably remain at variance with the pattern of political interactions and alliances of a political regime.

The big stumbling block in the deepening economic crisis in Zimbabwe is the unwillingness of the ruling ZANU (PF) party to transform its political culture. In spite of the rapid industrialisation and modernisation that is taking place in the Southern African Development Community, politically the government has opted to retain the usual African traits of heavy dependence on political patronage in business and undemocratic practices. Political patronage has remained a major vehicle for transacting businesses, in both the public and private sectors, and a hindrance to the creation of a truly prosperous, open and free market. Intolerance of dissenting views and repression of the opposition has remained a major feature of national political life.

The ZANU (PF) leadership naively believes that it can successfully adopt the western free enterprise culture, minus the political freedoms that normally go with it. On this issue, President Robert Mugabe is most vocal, often accusing the western nations of attempting to impose their own brand of democracy upon people whose political culture was incompatible with western democracy.

The governing ZANU (PF) believes that victory at the polls constitute democracy. To announce that local government elections can be held in January 2008 followed by presidential and parliamentary elections in March, is a sign that Mugabe is out of step with the rest of the world. Democracy is, in actual fact, far more than the mere act of periodically casting a vote; it covers the entire process of participating by citizens in a constant process of dialogue, consultation and consensus building.

It is a fact that democracy is exposed to a vast array of divergent pressures. Political factors bring into play an array of forces and divisive elements that can impose severe stresses on the institutional fabric of democracy and indeed on the integrity of nations. This imposes an obligation on all political stakeholders to help develop mechanisms that promote national consensus, mechanisms that deepen and give substance to the concept of consent, participation, legitimacy and accountability to the people. The crucial point is that the will of the people should be freely expressed within a framework of respect for the essentials of democracy.