Currency crisis and stark options

Zimbabwe’s stark choice—and how most of Africa could soon stare down the same barrel

The Mail & Guardian - Lee Mwiti

05 May 2016

Presidents promising overnight riches are elected, lofty pledges are made, grand visions proclaimed. So what then goes wrong?

Most Zimbabweans are facing the hardest economy of their lives, but President Robert Mugabe still got a birthday cake worthy of a 92nd birthday. (Photo/AFP).

HARARE:  Everyday life for the uninitiated in Zimbabwe can sometimes be surreal. During the slow death of its currency that was eventually confirmed last year, the country adopted an assortment of currencies ranging from the South African rand to the US dollar, with even the yuan and Indian rupee thrown in.

But due to market volatility around many world currencies, the American currency now reigns supreme. A taxi ride to a suburb will cost 50 US cents, a dollar will fetch you eight bananas, while the cheerful lady at the flea market just off Robert Mugabe Road will quote you $30, a bargain for the sturdy imported suitcase she dangles at you.

Given the multi-zero currency bills that Zimbabweans had to contend with, it is all much less of a headache.

But it is also not supported by economic fundamentals. Due to the extent of the dollarisation, it is relatively easy to run through a hundred dollar bill—a princely sum in many African countries—in a day. The negative inflation also tells a story—too few goods to trade are being produced due to the high cost involved, while once-lucrative tourism has become unaffordable for would-be visitors.

Zimbabwe’s path here begun with the near-bottomless debt and inflation triggered by controversial land reforms in the early 2000s, which saw major global players from the US and European Union to the International Monetary Fund queuing up to levy sanctions.

Printing money

Desperate authorities printed more money and devalued the currency at least four times to no avail. When the legal end came last year, the central bank offered a flat $5 for anyone having up to 175 quadrillion Zimbabwean dollars, or 5,000 trillion, in their bank account.

As financing options narrowed almost impossibly and the Chinese offered stiffer conditions, the country was in recent years forced to seek a détente with the West, an uncomfortable and often internally contested rapprochement that saw it eventually sign up for a strict IMF diet.

In a much-awaited final report released this week, the IMF’s Article IV assessment makes for some grim reading, but also offers a path out for the country to access much-needed financial support.  The lender says the current pain for Zimbabweans will continue as adverse weather has hurt its main economic activity of agriculture, deepening the existing crisis from reduced foreign investment and low commodity prices.

Saying the country’s economic difficulties “have deepened”, the IMF notes that foreign reserves are low—and crucially, the country remains in debt distress.

This is significant—for unless Zimbabwe clears its arrears to its creditors including the IMF, most of which date back over a decade, no new support will be forthcoming.

The IMF’s prescription towards Harare’s clambering out of this rut has been standard:  shed public sector jobs (civil servant pay gobbles up 75% of the budget), make taxes cost-effective and incur little new debt—unless on sweetheart terms.

The Washington-based lender also calls for a “transparent and consistent” application of Zimbabwe’s much-contested indigenisation policy where firms in the country’s natural resources have had to give up a controlling stake to black Zimbabweans.  In reference to the land seizures where it all begun, the country is also urged to compensate the owners, a process it has in recent months grudgingly ceded ground on.  

“Further progress on these fronts, as well as on clearance of external arrears, will pave the way for full re-engagement with the international community, allowing Zimbabwe to regain access to external financing, particularly from the Fund, in support of its development agenda,” the IMF’s executive directors said.

It is a lengthy list that Harare has to tick off on, with the lender saying it was aware of the difficulty of doing so in a “difficult political environment”— a veiled reference to current succession politics.

Reform, or…

While progress is noted towards meeting IMF demands, the message is however one of either conform, or you are on your own. This will require  “a step-up to a comprehensive and deep economic policy adjustment agenda…” the report notes.

Zimbabwe is not alone: the IMF’s focus on policy is further directed to sub-Saharan Africa, as it this week urged countries in the region to “reset” their policies if they are to see out the storm that has engulfed many major African economies.

This is highlighted in its Regional Economic Outlook on sub-Saharan Africa, which is derived from its 2016 world prospects report which found that the region’s economy last year grew just 3.4% to slump to a 15-year low.

Commodity prices fell through the floor, dragging down the region’s aggregate growth, while the after-effects of Ebola and drought added to the headwind for countries that were less dependent on resources. Borrowing costs of international markets also increased significantly, adding to fiscal deficits all around.

This year is expected to be no better, with growth seen at 3%, in what the IMF says could deepen if policy is not used to create buffers, and in an ordered manner—before countries are forced to do it anyway. The high growth of the last two decades and which nurtured optimism of a rising Africa was achieved through reforms and sound domestic policies, in addition to a highly favourable external environment, the multilateral lender says.

“With the external environment now much less supportive though, a policy reset is needed to reinvigorate the growth momentum.”

But it is not all straightforward.

The continent’s ability to create the necessary space and follow through on economic policy has been debated in several capitals around the continent, with many experts fretting that policy space has shrunk, citing factors such as World Trade Organisation rules, but they are now urging deliberate plans.

The latest effort is the African Capacity Building Forum, whose continental meeting is taking place only for the third time in its 25-year history in Harare; previous gatherings having been in Bamako and Maputo.

The ACBF, which advises blocs such as the African Union and trains thousands of policy experts both in government and not-for-profits, says that to prevent the debilitating nature of such “boom-and-bust” economic growth cycles, the focus needs to be the structural transformation of African economies to make them resilient to the external environment—a job that requires skills and institutions.

The Harare-based organisation says the challenge has been the inability of the continent to develop the required capacity—an opaque term often associated with the NGO world but which essentially describes the actual delivering on plans, a crucial but often underrated ability.

‘Alarming what we’ve seen’

The gap on this has seen African countries struggle to deliver on lofty pledges and grand visions, leaving the continent’s citizens frustrated—especially when they elect leaders who promise to change their circumstances almost instantly.

ACBF head Prof Emmanuel Nnadozie says he is in no doubt about the size of the task ahead in building ability and institutions.

“It is alarming what we’ve seen; everyone knew there was a problem, but we didn’t realise the magnitude of it,” he said in an interview with Mail & Guardian Africa.

He says a key challenge is to convince African countries to put their money where their money is by dedicating budgets and creating the space to tackle the deficit in ability, citing as an example the lack of transfer pricing units to tackle illicit flows in many countries.

Nnadozie says that African countries are however making gains in coming up with “homegrown solutions” to their growth challenges as the IMF has urged, but need a leg-up from organisations such as his, whose backers include multilateral development banks and the UN with projects in 45 countries, noting he is inundated with requests for help.

But all this could be treading water if a specific challenge is not addressed, he says. “You can have all the critical skills that you need in place, but if you do not have visionary, accountable and committed leadership, then you are really not going anywhere.”