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Can Zimbabwe Turn the Corner?

Praveen Kumar's picture

Much has changed in Zimbabwe since last November. There are signs of recovery following the return of price stability after full dollarization in January. However doubts about the political situation continue to obstruct further recovery.

The most visible sign of improvement is the demise of surreal hyperinflation which according to one estimate peaked at about 80 billion percent. Interestingly, full dollarization initially occurred not because the government chose it as a deliberate stabilization measure.  Exasperated residents simply abandoned the Zimbabwean dollar and moved on to using multiple hard currencies.  In January, the Government too abandoned the Zimbabwean dollar and started using the US Dollar and the South African Rand for both collecting taxes and spending.  Hyperinflation died a natural death in Zimbabwe, it was not tamed.

 

The impact of full dollarization has been quick and visible. Quickly gone were the long queues outside the banks waiting to withdraw cash. Unemployed youngsters who heckled people on the streets to exchange foreign currency left as well. The attention of businesses has returned to productive activity rather than seeking opportunities for rent-collection and arbitrage. Price stability has made it easier for them to plan ahead and they are re-establishing their supply networks.

These are no small achievements. Talk to any Zimbabwean on the streets and she will testify to the respite that the demise of hyperinflation has brought. US Dollars or Rands maybe scarce, but their value is not in doubt; people want to hold on to them rather than try to get rid of. Zimbabwean consumers are seeing what they had not seen for a long time – a decline in prices. Consumer prices denominated in US Dollars have declined by a cumulative 10 percent since January. Demand for consumption goods has boomed. 

The economy has also benefited from several liberalization measures. Almost all price controls have been discarded.  In January the government also dismantled most exchange control measures. Incentives to produce appear to have returned. Consumption goods have returned to the market and supermarket shelves are full again. Some mining firms, for example gold, are gearing up, encouraged by the removal of marketing controls.

Another sign of improvement is the slow but steady increase in government revenue collection. It increased from $5 million in January this year to $70 million in June. The government expects to collect $970 million in 2009 against $133 million in 2008. This has enabled the government to pay civil service salaries in US Dollars. As a result, delivery of basic services is seeing improvement, although limited. Civil servants, teachers, and health workers who had stopped reporting for work because daily transport costs were higher than their paltry $2-$3 monthly wage, have started returning to their jobs. Schools have reopened, and cholera is under control.

While dollarization and policy changes have brought relief, businesses face a very steep climb ahead. Cost of infrastructure services has suddenly gone up with the withdrawal of implicit government subsidies. Labor costs have increased after a long period of real decline. Low capacity utilization has reduced the scale of operation of most businesses, thereby denying them economies of a bigger scale. The sudden increase in costs faced by the businesses is to be seen against the background of much stiffer competition from imports. Retailers estimate that currently 70-80 percent, by value, of all consumer goods on their shelves is imported.

After dollarization wiped out working capital held in the form of Zimbabwean Dollar balances (only recently has the government announced that it will be willing to buy Zimbabwe Dollar balances with US Dollars later this year), firms have faced severe cash flow constraints. Banks are beginning to do some foreign currency lending but available local finance is of a short-term nature (typically 30 days) and relatively expensive. Interest rates appear reasonable (6-10%) but establishment fees can be steep since loans have to be renewed frequently (monthly or quarterly).  Banks are constrained by their own depleted capital bases, and limited dollar liquidity.

The economy appears to have come as far as it could in response to stable prices and policy reforms undertaken so far. It needs infusion of capital to go any further. And that is where Zimbabwe has fared poorly.  Foreign capital inflows have not picked up at all.

The reason for the dismal performance on inflows appears to be that perceived country risk remains high. A signal of high risk perception is that even the existing international firms, including banks, have been unable to source capital from their parent firms. These firms are expected to know their opportunities and risks well. Their behavior seems to indicate that they consider risks to be higher than opportunities.

Uncertainties about the indigenization law and the lack of trust in the Central Bank appear to be the key factors behind the risk perception. There are also concerns about the reversal of policy reforms, should the current political arrangement fall through.

So, can Zimbabwe turn the corner? The answer lies, perhaps, more in politics than economics.

Comments

Submitted by MOOTOOSAMY POOVATHAL on
I srongly believe that Zim can and the politics has a crucial role to play. politicians should sart thinking that the country and nation is above everything else. Only then can Zim turn the corner.

Submitted by Anonymous on
Agree with the conclusion that the answer to this question lies more with the politics than the economics. Unfortunately Zim has joined the league of African nations that started off so well after independence but through bad political governance have destroyed the economic platform that was originally established. One hoped that after considering the myriad of country examples before her, Zim would have preferred to go the Botswana route, alas she found political decadence a more palatable route to follow!

Submitted by Pratibha Thaker on
Agree with Mr Kumar that Zimbabwe's answer lies more with the politics than the economics. The IMF's recent assessment of the Zimbabwe economy and prospects for 2010 suggest that the Fund has accepted the government's claims that significant improvements are in progress. Although some companies have enjoyed a degree of recovery,the limited quantifiable evidence suggests that the advances have been enjoyed by too few to make the differences claimed, and that almost all of the momentum behind the slow improvements was brought to a standstill by the publication of the indigenisation regulations. Now the demands of the trades unions are threatening to put the fragile recovery into reverse. Unfortunately, some very brave and imaginative revisions to political policies would offer the only prospects of quick improvements. The IMF does not involve itself in public debates on such issues, but very much hope that the right suggestions are being offered in private.

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