Zimbabwe\u2019s financial system increasingly resembles a house of cards. Were one card to give way\u2014for instance, if South Africa\u2019s power utility, Eskom, were to have the temerity to suggest that Zimbabwe actually pay for the electricity that it\u2019s supplying the country\u2014the entire edifice would collapse.
\nTo put it another way, the government is bust. It is again printing money to cover its spiraling costs, and inflation is rising. And given that there\u2019s an election looming in 2018, Zimbabwe\u2019s ruling party, ZANU-PF doesn\u2019t want to cut-back. Far from it, it wants to carry on spending, as fast as it can.<\/p>\n
The rot goes back to the early 2000\u2019s. ZANU-PF profligacy had been fuelled by a continuous cycle of simply printing more money, and resultant runaway inflation. Mega-inflation meant that ordinary people lost their pensions and whatever savings they had, as the Zimbabwe dollar lost its value and people resorted to barter or the use of other currencies.<\/p>\n
Ultimately, the government faced no choice but to accept reality. In 2008 it scrapped the Zimbabwe dollar in favor of a basket of other currencies, although within a short time, this meant in effect the reign of the US dollar.
\n\u201cDollarisation\u201d allowed for the pursuit of more rational policies by the coalition Government of National Unity which followed the disputed 2008 election. However, its control of the electoral machinery ensured that ZANU-PF won a resounding victory in the 2013 election. Within a short space of time it returned to its familiar policy mix of profligacy, corruption and populist economics.
\nYet ZANU-PF faced major problems. Above all, \u201cdollarisation\u201d meant that the cost of Zimbabwe\u2019s exports on international markets was high. Worse, the dramatic collapse in agricultural production since the early 2000s (following the appropriation of white farms) alongside the decimation of the country\u2019s manufacturing industries meant that there was relatively little to export anyway. Tobacco production has recovered a little, but the quality is less than it used to be, so returns are relatively less.
\nMeanwhile government insistence that mines should be 51% Zimbabwean owned has done nothing to entice inward investment or boost exports.<\/p>\n
In short, the capacity of the economy to earn US dollars by selling goods externally has fallen dramatically, and the supply of money circulating within the country has dried up. Unemployment stands at around 90%.
\nPresident Robert Mugabe\u2019s latest response has been to replace finance minister Patrick Chinamasa, who had been warning of the structure\u2019s fragility in ever more urgent tones. The new finance minister is Ignatius Chombo, a party loyalist, who will brook no talk of any need for structural reform.
\nThe bond notes<\/p>\n
Faced by a looming crisis, the ZANU-PF government has resorted to three key strategies.<\/p>\n
One has been the issue of \u201cbond notes\u201d (of different denominations) by the Reserve Bank of Zimbabwe. Officially, they\u2019re designed to swell the amount of money in circulation within the country. The problem is that apart from having no value outside the country, nobody trusts them as they have been issued by a ZANU-PF government, and it was this government that presided over the hyperinflation.
\nThe government\u2019s announcement that it was issuing bond notes was met with a run on the banks as depositors sought to withdraw dollars as fast as they could. Their assumption was that this was a government ploy to reintroduce the Zimbabwean dollar. The Reserve Bank of Zimbabwe responded by limiting the amount of dollars individuals could withdraw.
\nPeople are reluctant to use the bond notes. But they\u2019re still sometimes forced to accept them because of the sheer shortage of \u201creal\u201d money. As a result when they can, they rush off to the local bus station where they can sell them for dollars to currency traders \u2013 albeit illegally.
\nThe second strategy has been the rapid expansion of country\u2019s ability to manage electronic transactions. Its aim has been to expand the amount of money in circulation without using up \u201creal\u201d dollars.
\nAccordingly, government employees are now largely paid electronically Similarly, government employees (and everyone else) now pay nearly all their bills within the country electronically.
\nAnd Zimbabweans are rarely able to convert the notional sums of dollars they hold in the bank into real cash \u2013 unless they make use of the currency traders in illegal transactions.
\nMeanwhile, with the rate of inflation continuing to rise combined with the widespread lack of faith in the banks, many Zimbabweans spend their bank balances on consumer goods as quickly as possible rather than attempting to \u201csave\u201d. After all, if times get hard, you won\u2019t be able to get rid of your bond notes, but you may be able to sell your fridge.
\nFanciful financial system<\/p>\n
But it\u2019s the third strategy which the government has pursued which is really fuelling a fanciful financial system.
\nSince 2013, government expenditure has steadily increased year by year, despite the country earning very little internationally. The ZANU-PF government may have hoped to fund this by its old trick of literally printing money, that is, by expanding the supply of bond notes.
\nBut such was the negative popular sentiment that the Reserve Bank of Zimbabwe seems to have restricted their issue. Supposedly the issue of bond notes is backed by a $200 million loan by the Afreximbank, but no-one really knows how many have been issued because the central bank provides no information.
\nWhat the government has done instead is to fund its rising costs by issuing treasury bills (whereby the government touts for loans on the capital market against promises of later redemption). No-one in their right mind would want to buy them, but Zimbabwe\u2019s banks today have little option. As inward investment into the country has dried up to a trickle, there is little else for them to spend their money on, and the interest rates that the government promises to pay are, at face value, attractively high.
\nThe coalition government of national unity recorded budget surpluses for three of the four full years in which the opposition controlled the Treasury. For its part, the ZANU-PF government recorded deficits of $186 million and $125 million in 2014 and 2015. Recently, the then finance minister Chinamasa projected a deficit of $1.41 billion for 2017. As of June 30, 2017, there were $2.5 billion worth of Treasury bills on issue.
\nThe ConversationIn other words, the spending will continue. Zimbabwe\u2019s financial system is living on borrowed time and borrowed money. It will again end in financial ruin, as it did in 2008. But all ZANU-PF cares about is ensuring that it wins the next election and allowing its political elite to \u201ceat\u201d.<\/p>\n","protected":false},"excerpt":{"rendered":"
Zimbabwe\u2019s financial system increasingly resembles a house of cards. Were one card to give way\u2014for instance, if South Africa\u2019s power utility, Eskom, were to have the temerity to suggest that Zimbabwe actually pay for the electricity that it\u2019s supplying the country\u2014the entire edifice would collapse. To put it another way, the government is bust. It […]<\/p>\n","protected":false},"author":30,"featured_media":102,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,6,8],"tags":[21,20,19],"class_list":["post-101","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-all-news","category-economy","category-head-lines","tag-eskom","tag-financial-system","tag-zimbabwe"],"yoast_head":"\n