Too Many Holes in the Hull – Currency auctions and other emergency measures fail to keep Zimbabwe’s economy afloat

Image: Flickr, Baynham Goredema
Image: Flickr, Baynham Goredema

Tanganda, the largest tea producer in Zimbabwe and one of the country’s most important exporters, had a pretty good crop last year. Despite low rains, it put Z$ 18 billion in profits on the books.

‘Whatever that may mean,’ sighed Andrew Mills, Tanganda’s managing director. Starved for foreign exchange and destabilised by the desperate policies of a failing regime, Zimbabwe has fallen through the bottom of the misery index: four-digit annualised inflation, 70% unemployment, negative interest rates. The currency is so unstable that exporters cannot calculate their earnings. Whatever Tanganda’s 2003 net revenues might have been worth in US dollars a month ago isn’t what they are worth now or might be next week.

Zimbabwe is creaking. Cracking. While the world dithers over what to do, eagerly hoping that South Africa will put its foot down and frustrated that it won’t, Zimbabwe is sliding into a self-destructing economic void.

Four years after President Robert Mugabe started swinging his fists against every political foe real or imagined – on the farms, in the mines, the courts, the media, the boardrooms – the foundations of Zimbabwe’s economy are being eroded in ways that will take a generation or more to repair. Exports have tumbled from US$2.2 billion in 2000 to US$1.35 billion in 2003, according to official figures. Not only is business collapsing, but the country is loosing technical and entrepreneurial capacity at an alarming rate.

The tanners and weavers, the hoteliers and sugar millers, the spinners and engineers and cabinet-makers are dwindling away. ‘We have had a significant net loss of human capital,’ said Luxon Zembe, director of the Zimbabwe Chamber of Commerce. ‘That will have a major economic impact.’

And there is no end in sight. Despite repeated rumblings of impending political negotiations between Mugabe and the opposition Movement for Democratic Change, the economic destruction continues unabated.

New amendments to the Land Acquisition Act, which enabled the government to seize virtually all commercial agricultural land without compensation, pave the way for Mugabe to go after the country’s largest remaining land owners: Tanganda’s tea estates, Anglo American’s vast sugar plantations, timber producers and any number of other agro-industries.

‘The economy is not fragile, it’s broken,’ said Robert Bunyi, an economist on the Africa desk at Standard Bank in Johannesburg. ‘Overall economic capacity is in decline. Overall social indicators are in decline.’

Critical shortfalls in foreign currency, caused largely by the collapse of agriculture, are at the root of the crisis. A fortunate few with ready supplies of cash have pulled through, even prospered. But overall confidence among ordinary citizens and the business sector has evaporated.

Most exporters, like the rest of organised commerce and industry, survived rising operating costs of between 400% and 750% during the last year because they could exchange 25% of their foreign earnings on the parallel market at the rate of about Z$6000 to US$1 through most of the last quarter of 2003.

In a desperate bid to ease currency shortages, Gideon Gono, the new reserve bank governor, opened foreign-exchange auctions in January 2004. The system enables exporters to trade more of their foreign exchange at a rate that falls somewhere between the official rate of Z$824 to US$1 and the parallel rate.

The auctions were meant to benefit both sides. The state would gain back much-needed cash from the parallel market and exporters would be able to conduct more business legally through their banks. There is some evidence of a modest positive impact. Currency speculation has tapered off, certain prices have fallen and parallel-market rates have tumbled.

But the auction rate is still managed – each transaction must be approved by the reserve bank – and by the start of February 2004 was pushing rapidly upward, leading economists to predict that renewed activity in the formal market may be short-lived.

In addition to multiple exchange and borrowing rates, exporters face other woes. Electricity charges have to be paid in US dollars. Soon phone bills will as well. Then there are the electricity cuts, declining worker productivity and crumbling roads.

Such is the fear of retribution that no black industrialist would talk on the record about their company’s circumstances. Even many of the country’s largest exporters have had to go to the Reserve Bank for bridging finance at the 30% rate supposedly on offer for the productive sector.

‘We don’t earn any Zimbabwe dollars and we were offloading at the previous parallel rate of Z$6000, so the drop for us is massive,’ said one major black exporter. ‘The bottom line is political, and until we engage the IMF and World Bank, which together with the donor community provided so much of our foreign currency, there will be continuing and deepening difficulties.’ – Peta Thornycroft

eAfrica, Volume 2, February 2004

6 May 2008