By Energy Mutodi
Zimbabwe is facing a cash crisis of unimaginable proportions. The first of this magnitude since 2003 when the government introduced bearer cheques. They have now introduced bond coins and bond notes to avert the situation. BUT it has been a long time in the making. Here are 10 reasons why Zimbabwe finds itself trapped.
1. Trade imbalances
Trade imbalances caused by the need to import more value than we export. Zimbabweans are importing almost everything from countries such as South Africa, Japan, UK and Brazil. Used car imports have taken toll in the recent years starting from 2009. Despite the fact that the country’s roads are in a sorry state, almost everybody is now a motorist.
Apart from the fact that the cars are imported using foreign currency, they require maintenance products such as oils, fuels and spare parts. The amount of foreign cash a single Zimbabwean spends per month is now more than treble what was needed prior to the influx in car imports.
2. Poor Agricultural production
A dead agricultural sector has also contributed to the demise of the Zim dollar and its replacement by the US dollar. Zimbabwe’s economy is essentially agro-based and government was not clever enough when it implemented a land reform program that removed white farmers who had capital and skills and replaced them with poor and unskilled black farmers.
Farming is a business and not a hobby and this education remains elusive to government no wonder why we are still reading about fresh farm invasions even years after the exercise is presumed to have ended.
Poor agricultural production has increased fiscal pressure as government now needs to import maize using foreign currency; a situation that could have been avoided by simply downsizing white commercial farm lands and allocating the land to productive black farmers while leaving white farmers with their productive pieces of land.
3. US Currency factors
The supremacy of the US dollar over other world currencies makes it more of an asset than a medium of exchange. Several countries such as China, Lebanon, India and others use the US dollar as a reserve currency and their businessmen store it as an asset for future consumption.
For instance, a Chinese national is better off if he keeps US dollars in his house for use by his newly born baby 20 years later than if he invested in a risky stock market that could erode his savings due to poor returns.
A Chinese trading in Zimbabwe therefore repatriates all profits back home and keeps them for future consumption. Finance officers in volatile emerging economies also pick the US dollar as a risk free asset in portfolio diversification.
4. Dollarization negativities
Informal dollarization has also manifested its negative consequences. Government has allowed for the use of multi-currencies but is reluctant to negotiate formally with the owners of the currencies for support.
By dollarizing formally, government can avert financial distress through using its future cash flows as a guarantee that it will pay back short term loans aimed at easing the liquidity situation.
There has also been over-reliance on the US dollar at the expense of other currencies. Traders in Zimbabwe prefer to be paid in US dollars than in rands due to the fact that the rand is unstable and has been losing its strength against the dollar more often. The bond coins that the government introduced are not a legal tender outside the country’s borders and are therefore also not preferred.
5. Public-sector corruption
This is another important factor. Yearly, Zimbabwean government officials loot huge sums of money which they then invest offshore to avoid trace for those funds in the event they are prosecuted in future.
Senior civil servants and government ministers own mansions outside the country’s borders and have local imported wealth which they can not account for. The high life styles for these government officials coupled with their frequent foreign travels bleed the country of the much needed US dollars.
6. Cash culture
Zimbabweans are cash barons naturally. Banks have also exacerbated the situation by failing to implement sound financial inclusion strategies. The probability that a robber comes out richer by robing a Zimbabwean is higher than if he robbed a nationality of any other country.
Other countries have avoided cash shortages through restricting cash transactions and encouraging use of plastic money. As a result of the lack of confidence in the banking sector, the majority of low and medium income earners are now relying on ECOCASH to do their transactions and that has deprived the formal banking system of the much needed cash deposits. Some companies are now paying salaries via the ecocash and a good chunk of diaspora funds is also circulating through Ecocash.
7. Indigenization policy
Statements by Youth & Indigenization Minister Patrick Zhuwawo on indigenization have sent negative signals to investors who now view the country as a risky and unpredictable investment destination.
Zhuwawo who admitted that he had misinterpreted the Indigenization Act had given companies including those not extracting the country’s natural resources up to 31 March to submit their Indigenization plans or shut down.
These companies include foreign owned banks that had been assured by Finance Minister Patrick Chinamasa and Reserve Bank governor John Mangudya that the policy will not affect them.
Former RBZ governor Gideon Gono had also given banks that assurance but the latest pronouncements by Zhuwawo who is President Mugabe’s nephew caused panic in the financial services sector.
8. Precious Mineral Depletion
Lack of activity in the Diamond fields has also added its weight towards the scarcity of cash on the streets. Between 2008 and 2013, formal and informal diamond mining allowed a boost in money supply and the shutting down of operations in the recent months due to the depletion of alluvial diamonds has negatively affected liquidity.
There are no reserves that government kept from the diamond proceeds that the country can rely on. Under normal circumstances, a patriotic government could have created a sovereign wealth fund to cater for our current cash-strapped situation. However, much of the diamond money was looted, prejudicing the country of more than US 15 billion dollars.
9. Weak Institutions
Strong institutions create a foundation for vibrant economic activity. Important institutions include the police, courts, universities, parastatals, hospitals, banks, and commissions such as the anti-corruption commission, human rights, public service, investments and revenue commissions or boards. Due to political interference, these institutions are no longer effective.
The law is applied selectively, some citizens disobey court orders, corrupt ministers are immune to arrest, journalists are either persecuted or silenced, incompetent officials are not fired, universities teach outdated curriculum, hospitals are dysfunctional and infrastructure is dilapidated.
Poor institutions tend to bleed the economy of its cash resources because citizens substitute local services and products with foreign ones. For instance, there is an increasing number of Zimbabweans seeking medical services and higher education outside the country where they are forced to pay exorbitant prices financed by this economy.
10. Political risk factors
Zimbabwe’s political risk is at its peak due to the ongoing succession fights in the ruling ZANU PF party. Now aged 92, President Mugabe who has ruled the country since independence from Britain in 1980 remains unmoved by the country’s economic crisis and has indicated that he intends to run again for office in elections due in 2018 when he would be 94 years of age. He has refused to nominate a successor and has also remained mum on his retirement plans.
Additionally, 3 in 4 South African businessmen who have a direct interest in Zimbabwe believe that President Mugabe wants his wife Grace to succeed him. This has made capital inflows into the country to slow down as business takes a wait and see attitude.
Furthermore, President Mugabe has not renewed his government in many years, recycling the same people over and over again to hold critical cabinet posts. Due to the changing times, the old ministers have failed to be innovative and creative enough to stir around the economy.
Business and the whole economy continue to face financial distress and companies continue to close causing unprecedented unemployment and brain drain. While there is no hope that the economy will improve under the current ZANU PF government, there is no prospect that the party can be dislodged from power as the opposition remains in disarray with virtually no chances for a grand coalition.
- Energy Mutodi is a Doctoral student at the University of Cape Town specializing in Finance. He completed his Master of Business Administration degree (Finance Specialization) at the University of Zimbabwe in 2015 and has also completed taught Financial Decision Making & modeling courses in PhD Management studies at the Walden University, USA. He is also studying Law at the University of Zimbabwe and is a member of ZANU PF