Honest, open and genuine dialogue can help Zim move forward

THE effort put in by Finance minister Mthuli Ncube and Reserve Bank of Zimbabwe (RBZ) governor John Mangudya to take Zimbabwe from its economic woes is commendable, but the two must understand that it’s a waste of time and resources for a doctor to operate a patient for the purposes of curing a headache; pain killers can do that.

guest column: David Mhlanga

Zimbabwe is in dire need of an open, honest and genuine dialogue involving everyone from churches, political parties, government, non-governmental organisations (NGOs) and the general population in order for the country to move forward. A perfect understanding of the root cause to the problems affecting the country is a prerequisite before giving a prescription, lest the doctor will give the wrong drug and kill the patient.

Zimbabwe’s economic crisis originates from the struggle for independence in the 1970s. Military adventures and reckless spending led to exploding budget deficits, together with the forced seizure of commercial farms, which affected agricultural production, the engine for the economy, through the forward and backward linkages. All the problems affecting Zimbabwe now can be traced back to 1970s because the problems revolve around politics, and not much of economics.

The economic crisis, which originated from the 1970s due to the armed struggle, was solved at last by dialogue. Dialogue made it possible for Zimbabwe to move forward.

In the second decade of its independence, the Zimbabwean government launched an economic reform programme essential in liberalising the economy and dealing with the structural impediments to growth. However, fiscal policy was weak and monetary policy unsteady during that period; and the country suffered from two serious droughts in 1992 and 1995, which affected Zimbabwe’s agriculture, its primary economic industry. Even though the country suffered from drought, the crisis was manageable. More importantly, land reform had been a highly contentious issue since independence, as the majority of prime agricultural land was owned by about 4 000 white commercial farmers, while the indigenous population continued to engage in subsistence farming.

The beginning of political problems

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In the second half of 1997, under mounting political pressure, the Zanu PF government announced a new compensation and pension plan for war veterans who fought for independence.
The payouts applied to approximately 60 000 war veterans, each of whom were to receive an immediate compensatory payment of ZW$50,000 the equivalent of $3 000 at the time, alongside a monthly pension equivalent to $125. The total package amounted to approximately 3% of the 1997 gross domestic product and was not included in the 1997 budget for the fiscal year.

The payments had the immediate effect of inflating the budget by 55% on the previous year. The following month, Zimbabwe’s standing line of credit with the World Bank was suspended until the government had demonstrated that the payments would not result in a higher than the projected 8,9% budget deficit in the 18 months leading to December 1998.

Following the new pension package, the war veterans expressed discontent with the success of the previous land reform programme, and began to press for its acceleration. In November 1997, then President Robert Mugabe responded to these pressures, announcing plans for the compulsory acquisition of white-owned commercial farms, again without elaboration on the financing side of the transaction. Thus, 1 471 commercial farms, representing a significant portion of Zimbabwe’s commercial farming land, were gazetted for compulsory purchase.

The lack of budgeted financing for both the pension payment packages and the land acquisition process created investor panic about the future fiscal position of the Zimbabwean government. The resulting flight of foreign capital caused crashes in the Zimbabwean money and capital markets and exhausted the foreign reserves of the RBZ. This culminated in the crash of the Zimbabwe dollar on November 14, 1997, a day referred to as “Black Friday”, when the Zimbabwean dollar lost 75% of its value against the United States dollar.

In June 2000, a fast-track resettlement programme was announced by the government, covering five million hectares and 150 000 families, compared with the 3,3 million hectares and 73 000 families resettled since independence. In the process, the State listed 2 455 farms for acquisition. For the purposes of announcement, the government announced that it would provide compensation for any capital improvements to the land, but not for the land itself.

The pace of economic deterioration picked up again in the first five months of 2005. Year-on-year inflation stabilised at around 135% in early 2005, before picking up again to 164% in June. Hyperinflation was fuelled by the RBZ’s quasi-fiscal activities, which had caused a rapid increase in the banks’ deposits with the central bank, and thereby rapid increases in local currency M3, which includes local currency-denominated cash in circulation and deposits with the banking system.

However, the printing of physical notes was unable to match the expansion of local currency M3. In the third quarter of 2008, real money demand and the parallel market exchange rates collapsed in response to the still-accelerating inflation. As a result, by the end of the year, reserve money declined to an equivalent of approximately about $7 million at the United Nations exchange rate of Z$35 quadrillion per US dollar.

Dollarisation helped to stabilise prices, improve revenue performance, and, perhaps most importantly, helped impose fiscal discipline on the authorities. One can ask how was it possible for the country to dollarise, the reason is simple, there was dialogue between the opposition MDC and Zanu PF. The unity shown by the different political parties at that time made it possible for Zimbabwe to skip the economic quagmire it was in.

Currently, Zimbabwe is in the same situation it was in 2008, physical notes (the bond note) are unable to match the expansion of local currency M3 which includes local currency-denominated cash in circulation and deposits with the banking system.

As a result, inflation is sky rocketing. Of course the question which remain is: What must be done? The simple answer is dialogue is the way to go. Dialogue is important because the problems affecting Zimbabwe are in totality problems related to politics. Politics is directing economics instead of economics directing politicians, the RBZ is not independent from government influence, the economy is in a crisis of confidence, business confidence, investor confidence and consumer confidence caused by reckless spending by politicians, leading to exploding budget deficits. To solve this problem all the stakeholders must put their heads together churches, political parties, government, NGOs and the general population of Zimbabwe.

 David Mhlanga writes in his personal capacity

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