Austerity a necessary evil

guest column Eddie Cross

We are now nine months into the Transitional Stabilisation Programme and a great deal has been achieved. Let’s summarise:

  • We have eliminated the fiscal deficit that was the main driver in the past five years under former President Robert Mugabe, of inflation and rising domestic debt on an unsustainable basis;
  • When we delinked the US dollar from the RTGS dollar/bond currencies, we held about US$200 million in private nostro accounts, today we are approaching US$1 billion;
  • We have created an interbank market for foreign currencies and this has started to function and attract foreign exchange balances;
  • Despite rising inflation (expected to be short term) we have resisted any form of price control except on certain staples and essential inputs (energy);
  • We have imposed on all government ministries and parastatals strict financial discipline and controls on all expenditure; and
  • We have concluded a new Staff Monitored Programme with the International Monetary Fund and in the background paper to that decision, the fund has recognised the very considerable progress made.

    These are not small steps forward; they are giant strides taken in very difficult conditions. It is now recognised that our basic macroeconomic fundamentals are sound. Why then is the exchange rate running as if there is no tomorrow and the chaos in markets, as people struggle to discover what price they should be charging for anything. Living standards have collapsed and the great majority of people cannot even afford the basics or get to work. Something is fundamentally wrong. The question is what?

    Over the past 39 years of independence, we have created a network of corrupt individuals and organisations that has involved the decision makers in government and in many parts of the private sector and which has been able to syphon off from our economy perhaps as much as US$120 billion. The fact that we are still standing despite this massive drain on our resources and economic activity, is because the great majority of our people have retreated into the informal economy, where they do not pay taxes and avoid scrutiny for what they are doing while they try to make a living. Even the IMF estimates that we are over 60% informalised.

    We have even invented names for them — “Queen Bee” (why not King Bee?) and called them “Cartels” because they work closely together to protect their activities and wealth. The evidence is all around us — massive houses that would be better located on Hollywood’s Boulevard. Rumours abound of expensive houses in all parts of the world involving people from the President down to relatively low-ranking civil servants and people in the security forces. Yesterday I had breakfast with some friends and when I went out to collect my car, it was parked next to a top-of-the-range Bentley — worth probably several hundred thousand dollars.

    Young people drive around in expensive cars and exhibit an arrogance that can only come from wealth, privilege and protection. Flights to Dubai for shopping are fully booked each week, yet we cannot pay our staff a living wage.

    How do we deal with the malady

    I would like to follow the late Ghananian leader Jerry Rawlings example; when he took over in Ghana, he had the police arrest 15 major and well-known corrupt people, took them down to the beach and had them executed in front of a crowd of 15 000 people. The Chinese government had an official who was number three in the politburo arrested in a politburo meeting and three days later he was executed for a crime that we in poor, impoverished Zimbabwe, would regard as petty cash. Too harsh? Not at all, when you understand how quickly corruption can become embedded in a society and cripple the real economy.

    How do we put this right? Firstly, there has to be a commitment to eliminating the worst forms of corruption in our society from the very top. If the President and his Cabinet do not exhibit such a commitment in lifestyle and in practice, then little can be done except vote in the next election, if that means anything.

    Secondly, we have to go after the wealth created by corrupt practices — a good example is the action taken at Zinara, where an audit report has resulted in the State going after the assets of the former chief executive who cannot explain where it all came from. Go after the money, that was the advice to Africa by the anti-corruption chief in Kenya. This will quickly send a message to key players and the exit gates at our airports would soon see some significant departures. Ask a number of former and current Cabinet ministers where their wealth came from? Ask them in an open court in front of a senior judge; and the private sector players should not be excluded.

    But the real answer, which would be fast and efficient with immediate benefits would be just reintroduce a real market economy — across the board.

    For example, if we introduced a few simple rules to the interbank market for foreign currency and created a real, transparent, open market operated by the banks under supervision and insist that all foreign currency transactions in the formal sector go through that process, I can assure you that the market would establish itself as the determinant of the value of local currencies in all other currencies — just as it does in every other economy in the world.

    The consequence, would be that the real market determined rate would fall rapidly to where it should be, 3 or 4 to 1 for the US dollar. Many people will laugh at this assertion — just as they did when I said at a conference of our accounting profession, that the bond note was the strongest currency in the region. Even now it is trading freely at 5 to 1.

    The economic fundamentals do not in any way support an exchange rate of 7 or 8 to 1. Last year when the Minister of Finance delinked the local currencies from the US dollar and exposed the myth that we were at 1 to 1, the result was a collapse to 7 to 1 with a quick recovery to 2,8 and 3 to 1. What is happening right now, in the absence of a real interbank market, which people can respect and trust, is that the majority of trades are behind closed doors among people who want the rate to run because they are making so much money from the process.

    Even the banks are involved, exporters and the diaspora love it because they are making money hand over fist. The only people who suffer are those who face the markets and must pay huge premiums on goods and services, because no one knows where the exchange rate is going and everyone expects it to continue to climb.

    So simple — we do not need an IMF bailout, we do not need a saviour in the form of another government who will give us hard currency which the thieves in our midst will simply steal, we just need a real open market, run properly. We could do that on Monday and on Tuesday we would be in a different country.

    Then we need to open up the market for fuel and basic foods. Let anyone who wants to import and sell anything go to the interbank market, buy the foreign exchange they need and import fuel and sell it on the open market. The fuel and food markets are highly competitive and the resulting free markets, with a stable and real exchange rate, would quickly bring about free supply at real prices. Queues would vanish in a few days and the cartels would collapse.

    Then the President himself, should call a national indaba to decide what to do about wages and salaries so that our people can live again.

5 Comments

  1. Austerity is indeed a necessary evil BUT it must be implemented from top to bottom, what parent comes home everyday to hungry children smelling braai meat and expensive whiskies.
    To say Mhtuli’s TSP has achieved a great deal is an over-statement, a school kid that has been scoring zero out of ten then scores 1 cannot be labelled 100% improvement unless if its meant to flatter the kid.

  2. Tafadzwa Maguta

    It is encouraging to note that we so many people with such insights,however as much as i believe that the austerity measures are a necessary evil,my worry and i hope everyone’s too,is the ability of our government to take these bold steps,face the criminals,prosecute them and even hang them.

    The problem with our Economy is that we have individuals,who controls it and what makes matters worse is the government is desperate to protect these criminals.Our Economy if we are to go further,we need to open it to competition,have more and big companies in certain sectors of the Economy,as much as we have OK,TM in the Retail,Econet in the telecoms,Zbc and Radio Zim in the broadcasting and electronic media,among other monopolistic companies,the TSP will remain a dream in the long run despite the posative signs,the minister of finance is boosting of.
    As a word of advice,i advice the minister to watch the movie,’three man who built America’,Zim is in that kind of scenario,unfortunately these guys are not building but they are destroying it,and the government is the biggest looser because people will come after it,so they have a choice,to be bold with these cartels and take the necessary steps or wait for them to destroy the Economy,and let mob justice befall them.
    Let our Economy be open to competition,stop protecting these cartels,they are of no good to this country

  3. Mr Cross, l do agree with your article but l think Mr Jerry Rawlings is still alive and will be turning 72 on 22 of June

  4. GLADMORE NYAMANDE

    Mr Cross, l do agree with your article but l think Mr Jerry Rawlings is still alive and will be turning 72 on 22 of June

  5. The beautiful ones are not yet born

    They usually say that the Fish rots from the head… If there is a turn-around it has to start there. The question is can top political allies be sacrificed for the sake of the country?

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