Author: TSA Press

A man holds Zimbabwe bond notes in Harare, Zimbabwe, 09 September 2018. The newly appointed minister of Finance and Economic Development, Professor Mthuli Ncube, in an interview with the local weekly Sunday Mail, was quoted as saying that the current currency approach was not working in that way that the country adopted the US dollar and removed the bond notes in circulation through a demonetisation process. EPA-EFE/AARON UFUMELI 

Zimbabweans are heading into yet another bleak festive season, with basic commodity costs soaring beyond the reach of many, and basic service delivery on the brink of collapse. The health system is barely holding, with junior doctors on three-month industrial action and teachers threatening to follow suit.

Civil servants are demanding salaries pegged at the formal US dollar exchange rate known as the interbank rate. There is a real risk of basic commodities running out, and fuel queues continue unabated. There seems to be no real solution in sight. To address the myriad social and economic woes, the currency crisis must be addressed urgently.

This year has seen many twists and turns in Zimbabwe’s long-running currency saga. In February, the electronic real-time gross settlement (RTGS) dollar was officially adopted as a local currency, alongside bond notes and multiple foreign currencies. In June, the use of the US dollar and other foreign currencies was outlawed for most transactions, while in October, Zimbabwe dollar notes were reintroduced.

In the process, the value of the local currency has plummeted. Originally the RTGS dollar was simply a US dollar held in a bank account. Over time the fiction that the “bank” dollar was worth US$1 could not be maintained, as banks lacked the US dollar reserves needed for convertibility.

The value of this bank (or mobile money) dollars has continued to drop, from an official rate of 2.5 per US dollar back in February to around 16 in the interbank market and 25 in the parallel market in early December. In the process, inflation has sky-rocketed and incomes have been slashed.

Zimbabwe’s currency crisis has been long-running. It goes back to the fixed exchange rate days and shortages of foreign currency since independence, to the rapid depreciation and re-denominations of the currency during the 2000s, culminating in hyperinflation and the eventual formal “dollarisation” of the economy in 2009.

Zimbabwe isn’t alone in its currency instability; many countries have been through periods of high inflation, weak domestic currencies and shortages of foreign currency. The root causes are always similar: a combination of bad macroeconomic policies, fiscal and balance of payments deficits, and excessive monetary expansion.

However, Zimbabwe’s experience is unusual in several respects. In few countries has inflation spiralled completely out of control into hyperinflation. Similarly, in few countries has currency breakdown been so extreme that the domestic currency was completely abandoned.

A more typical experience is that as confidence in the domestic currency declines (due to high inflation), citizens and firms switch to holding their bank deposits and making transactions in a foreign currency, usually US dollars. This “partial dollarisation” involves the coexistence of the domestic currency and US dollars in the financial system. Some countries have managed to recover from this, and re-establish a credible domestic currency.

The situation in Zimbabwe from 2009 to early 2019 was complete dollarisation, with no domestic currency. This is not particularly unusual – there are 13 other countries in the world that use another country’s currency. What is unusual is the attempt to reintroduce a domestic currency after complete dollarisation due to a currency collapse.

Some countries have introduced new currencies – Botswana in 1976, and the Czech and Slovak republics after the break-up of Czechoslovakia in 1993 – but the success of these efforts rested on the credibility of these countries’ (new) central banks and macroeconomic policies. These factors are not present in the case of Zimbabwe.

Zimbabwe is trying to introduce a new currency with a two-decade history of economic and currency crisis, and a central bank that lost much of its credibility during the era of hyperinflation.

It has been claimed that Zimbabwe needs to reintroduce a domestic currency because of the need to have its own independent monetary policy. But this isn’t a valid argument. There are 57 other countries that have no separate legal tender, are members of monetary unions or operate a currency board, and hence don’t have an independent monetary policy.

Based on international experience, re-establishing a stable and credible Zimbabwe dollar would be a tall order. The minimum requirements would include restoring macroeconomic stability; ending government fiscal deficits, and quasi-fiscal operations by the Reserve Bank of Zimbabwe; complete transparency in the foreign exchange market and RBZ operations more generally; and ending compulsory forex surrender requirements for exporters, subsidies for imports, and access to foreign exchange at privileged rates.

Zimbabwe also needs to negotiate a quasi-HIPC (heavily indebted poor country) arrangement with its creditors to reschedule and reduce its foreign debt and re-establish access to international capital markets.

Does Zimbabwe have other currency options that could lead to a sustainable outcome? Given the need to re-establish macro-economic credibility, adopting an external monetary and institutional anchor is almost essential. Back when the multi-currency regime was introduced in 2009, many analysts considered that it would make more sense to adopt the South African rand (ZAR) as the domestic anchor currency, rather than the US dollar. The ZAR is more relevant considering Zimbabwe’s trade patterns, and less likely to lead to competitiveness problems.

But unlike the US dollar, which can be used by any country unilaterally and doesn’t need the agreement of the US government, adopting the ZAR needs the agreement of the South African government and Reserve Bank. To get a nod from SA’s central bank, Zimbabwe needs to put its house in order.

The independence of Zimbabwe’s central bank has to be assured and an independent Monetary Policy Committee put in place. Zimbabwe’s Finance Minister, Mthuli Ncube, established this committee in September, but its independence is yet to be tested. Zimbabwe’s government also needs to be consistent regarding economic policy reforms to guarantee some measure of economic stability before they can be considered for the rand monetary union.

While it’s not certain that the Common Monetary Area members would admit Zimbabwe as a member, opening negotiations to explore this option could be the first step in re-establishing currency stability in Zimbabwe. DM

Bulawayo, Zimbabwe – Every morning, just before the daily power cut kicks in, Juliet Gumbo enters her kitchen to start preparing her meal. It will be her only food for the day, but she will have it hours later, when she returns to her electricity-lacking home after a day spent farming or hawking goods on the streets of Bulawayo, Zimbabwe’s second-largest city.

Gumbo, a 52-year-old widow lacking a steady job, is just one of many Zimbabweans struggling to cope with a scorching drought and economic instability that have pushed millions to the brink of famine.

“I eat what I can get,” Gumbo said.

Zimbabwe is in the grip of its worst economic crisis in 10 years, with inflation soaring to 300 percent and the population suffering fuel shortages, power rationing and currency woes. Emmerson Mnangagwa, who succeeded Robert Mugabe after a military intervention forced the longtime president to resign, has struggled to revive the economy while the long-standing financial troubles have been worsened by extreme weather shocks.

And now Zimbabwe is facing major food insecurity as many people do not have enough food to eat or they cannot afford it. According to Hilal Elver, the United Nations‘ special rapporteur on the right to food, the country is on the verge of “man-made starvation”, with close to 60 percent of its 14-million population being food insecure.

After an 11-day visit last month to areas hit by the El Nino-induced drought, Elver said the crisis affected a “staggering” 5.5 million people in rural areas and a further 2.2 million in cities.

“These are shocking figures,” she said, adding that notwithstanding the devastating effect of recurrent droughts and powerful cyclones, the crisis was partly due to chronic economic mismanagement, high unemployment, widespread poverty and rampant corruption.

Sanctions and failed policies

In her statement, Elver also suggested economic sanctions by the United States and the European Union against officials and entities linked with the ruling ZANU-PF party over alleged abuses are contributing to Zimbabwe’s current malaise.

The government in Harare also says sanctions are impeding economic growth and “hurting ordinary Zimbabweans” – but the US embassy refutes the claim.

“The government of Zimbabwe’s failed economic policies, not sanctions, hinder Zimbabwe’s economic growth,” the embassy’s press office said in a statement to Al Jazeera.

“Billions of dollars have been lost due to decades of corruption and harmful economic policies which have culminated in the current economic crisis. Implementation of economic and political reforms are the key to improving Zimbabwe’s trajectory.”

Analysts say years of shifting policies on land reform and food subsidies under Mugabe and Mnangagwa are also partly to blame for Zimbabwe’s food scarcity.

The country’s agro-based economy began to collapse following the state’s violent seizure in the 2000s of an estimated 10 million hectares (25 million acres) for redistribution from white commercial farmers to resettle the landless black majority. Mugabe’s government over the years resorted to price controls and money printing to tackle skyrocketing inflation and food shortages, but the measures impoverished local state-owned agricultural companies and contributed to the collapse of the local currency in 2009.

Although the removal of sanctions is a key demand of the post-Mugabe government’s re-engagement with the West, the country is battling to stabilise its economy as it transitions from a decade of using the US dollar as part of its multiple currency system.

But the reintroduction of a local currency at the end of February and, more recently, the reversal of a decision to remove a government subsidy on maize have failed to ease the situation.

Last week, Finance Minister Mthuli Ncube said the government is making “perfect” efforts to reform the economy and attribute the larger part of the crisis to natural disasters and bad luck.

“Who gets a cyclone, and then another, then drought then power outages?” Ncube told reporters on Wednesday, referring to this year’s farmland-ravaging Cyclone Idai and Cyclone Kenneth that followed it. “That is a classic example of being unlucky.”

On Thursday, the government announced that the price of a 10kg (22 pounds) bag of maize meal selling for at least 105 Zimbabwean dollars ($6.32) would drop to 50 Zimbabwean dollars ($3.32).

But some consumers are doubtful if price controls will have any effect on escalating costs.

For Gumbo, her monthly state grant of 45 Zimbabwean dollars ($2.71) of her late husband’s benefits is inadequate to meet her living needs. With the price of mealie meal – a staple food made from milled corn – beyond her reach, she opts to plant maize hoping that she will be able to yield a harvest in March that could help her to survive a further six months.

“I still can’t afford it; today, they [the government] will say it’s 50 Zimbabwean dollars but the price will still go up in the shops,” said Gumbo, a sometimes seasonal farmer. “I’d rather plant and hope the rains will improve so I can have something to eat.”

Zimbabwe’s food scarcity problems, however, are not recent. Once a regional breadbasket, the country over the past 10 years has been hit by rising food insecurity partly due to the fast-track land reform programme that saw a drop in agricultural production – mainly of dairy, beef and wheat.

While those who took over the white-owned farms have contributed significantly to the domestic consumption of corn, production remains insufficient to build up a store of grain reserves.

And now, even some of the resettled face eviction.

In the southern district of Umguza, an area 500km (311 miles) south of the capital, where some of the earliest resettlements took place, Sikhumbuzo Mlilo and his partner Buyiswa Moyo live on a plot apportioned from a white-owned commercial farm.

The pair, who have been farming the land since 2000, allege that in October they were issued with an eviction notice.

“We need to eat so we can survive, but if they tell us to leave this land after being here for so long, how do we plant our crops, where are supposed to go and find new land?” he told Al Jazeera.

The 44-year-old said the order made an already tough situation even worse for his farming-dependent family.

“Last [rainy] season we did not reap much from the harvest because the rains came late, so we’ve had to buy maize meal in town, but now it’s so expensive it’s hard for us,” he added. “We just can’t afford it.”

Following the toppling of Mugabe after 37 years in power, Mnangagwa pledged to end eviction of white commercial farmers while maintaining there was no going back on land reform. Though seldom, eviction of white farmers still occurs while resettled black farmers who are not productive on their land have been warned of expulsion.

Mlilo denies underutilisation and suggests the plots of those threatened with expulsion could be earmarked for a larger farming project for “those with money and good government connections” – a fear also echoed by other resettled farmers.

Since the land seizures, Zimbabwe depends on production by subsistence farmers to provide the bulk of its maize needs, but local wheat production is inadequate.

As a result, the country suffers from a cereal deficit with current production falling short of 761,000 metric tonnes needed for 2019-20, according to regional statistics from the UN Office for Humanitarian Affairs. Cereals and pulses such as wheat and soya beans are largely imported but due to chronic shortages of foreign currency, the government has struggled to pay for importation which has resulted in periodic shortages of bread and cooking oil.

Meanwhile, over the past year, the price of bread has increased more than four times as bakers and millers struggle to keep pace with the quickly eroding value of the local currency against the US dollar.

Mangaliso Ndlovu, the former minister of trade and industry and current environment and tourism minister, acknowledged that inflation has drastically reduced the purchasing power of many Zimbabweans despite regular adjustments of civil servants’ salaries.

“The wages have not been aligned to the exchange rate and that has been the major challenge which we are gradually addressing,” he said.

“There is a challenge when it comes to food security and that is why we have put a flash appeal to the United Nations. When we talk of people going hungry we are literally talking about food on the table and this is a direct impact from the drought and this has stretched government’s social protection programme.”

In an effort to combat escalating prices, the government has launched the National Bakeries Programme, a series of community initiatives around the country where entrepreneurs use wood-fired ovens to make a cheaper version of bread.

The lower standard of homemade bread has not caught on, however, as the small bakeries struggle to produce enough to compete with bigger competitors.

Instead of buying bread, Nokusila Ndlovu, 27, an unemployed mother of four who lives on the outskirts of Bulawayo has resorted to making vetkoeks, a regional version of doughnuts, on an open fire to feed her children.

“I can go without food the whole day, sometimes I eat one meal, but my children can’t. So I have to find cheaper alternatives to bread. The price is just too much for me. So whenever I have money, I buy flour to make vetkoeks to keep them full,” she said.

In an attempt to plug the nutritional gap faced by low-income households, the World Food Programme hopes to deliver more than 240,000 metric tonnes of essentials during the first half of 2020 – but the UN food agency faces a colossal task.

The WFP has appealed for nearly $300m to meet Zimbabwe’s emergency needs, but less than 30 percent of funding has so far been guaranteed.

“Funds are required immediately for WFP to meet the growing needs of the hardest-hit Zimbabweans,” it said in a statement.