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FOCUS: ANALYSIS
Analysis: Zimbabwe's dire forecast
With the Zimbabwean dollar in rapid decline, the economy is now past tipping point.
Last Modified: 14 Sep 2008 22:50 GMT

With local currency in decline, the government has allowed Zimbabweans to trade goods and services using US dollars [GALLO/GETTY]

It is obvious to just about everyone – with the apparent exception of the government of Robert Mugabe, the president – that Zimbabwe's economy has passed "tipping point". 

Inflation escalated from 7,500 percent a year ago to 100,000 percent in January and 11.2 million per cent in June. Current estimates put the annual rate at around 30 million per cent for September.

But because no one is able to measure prices accurately, the precise figure is not known.

In the past two weeks alone the Zimbabwe dollar has collapsed from 300 to the US dollar to 15,000, on some occasions, losing half its value in a day. Last week, the rate collapsed from 7,500 to 15,000 to the dollar.

Production in agriculture, mining and manufacturing has more than halved since the political crisis started in 2000, and a recent industrial survey shows that manufacturing industry is operating at less than 20 per cent of capacity. 

The shops are empty. More and more people are resorting either to crude barter – a cabbage for an egg, or a few tomatoes for a loaf of bread – or to under-the-counter deals in foreign currency.

Foreign currency

New business areas have opened up, especially in Harare's plush northern suburbs, where informal shops sell a wide range of products, both imported and locally-manufactured, but also for US dollars or South African rands.

Still further evidence of accelerating collapse came last week from Gideon Gono, the Central Bank governor, when he "legalised" the use of foreign currency for paying for goods and services.
 
A defensive Gono insisted that he was not "dollarizing" the economy – in fact that has happened already – but merely making it easier for shoppers because local currency is scarce due to his monetary policies.

The "reform" will help the fortunate few with access to foreign currency while enabling the government to exercise its political patronage in giving foreign currency licences to favoured retailers and wholesalers.

Gono made no mention of industrialists, farmers and mining companies who, presumably, will be forced to use the local currency.

Social services collapse

Disheartened by news of a failing economy, many have fled to other countries [AFP]
This burgeoning informal sector is unlikely to survive for long, since once there is a political agreement – and so rapid is the pace of economic decline that this cannot be too far off – the formal economy will revive.

Accordingly, informal traders are making as much hay as possible while the sun shines.

As a result, US dollar inflation (about 5 per cent in the US) easily exceeds 50 per cent in Zimbabwe. It is a sellers market and the traders are exploiting their short-lived opportunities to the full.

While economic collapse is a heaven-sent opportunity for Zimbabwe's enterprising traders, it is a disaster for the poor, the elderly and the sick.  

Basic social services have collapsed in high-density urban areas. Teachers do not report for work; government doctors are on strike, and while private medicine operates relatively efficiently, it is too expensive for the vast majority of the population and doctors and dentists prefer payment in foreign currency.

The middle class, once the bedrock of this economy has diminished – doctors, teachers, nurses, engineers, artisans and lawyers have left the country.

Zimbabwe is now a highly polarised society economically with a thin veneer of very prosperous entrepreneurs, including government ministers and officials, policemen and military officers and well-connected businesspeople, known generically as "the chefs".

They have never had it so good, but their prosperity depends on their political connections. Take those away and they will be in trouble, which is why they continue to back Mugabe in his stand to cling on to power at any cost.

At the other extreme are the poor – an estimated 80 per cent of the remaining population of some 10 to 11 million live on less than one US dollar a day.  

No one knows how many people have emigrated, mostly to South Africa, Botswana, the UK and Zambia, but estimates put the figure at a minimum of two million people. 

Diaspora income

Today, most Zimbabwean families depend on Diaspora income to stay alive. Without remittances from relatives and friends living abroad, many Zimbabweans would simply not survive.

It is unlikely that any business, outside the informal traders, money-changers, and of course, banks, is operating at anything like full capacity.

Even simple consumer items, Coca Cola or local beer, have disappeared from the shelves. One leading upmarket clothing retailer says its main money-spinner these days is the sale of enamel pots, pans, plates and mugs."

"That's a measure of income and living standards in Zimbabwe," says a manager.

Each time the political parties meet for talks about forming a unity government to fill the present vacuum, there is no shortage of business optimists, predicting a massive boom, fuelled by billions of dollars of foreign aid and foreign private investment.

Thousands, even millions, of Zimbabweans will rush home to cash in on the post-Mugabe bonanza.

Long wait

But will they? One methodical research study suggests that the more skilled Zimbabweans will stay in the Diaspora, rather than giving up good jobs for the uncertainty of a long and painful economic recovery.

Some economists reckon it will take 10 to 15 years for incomes to return to pre-crisis levels.

Economic recovery will be seriously constrained by the country’s infrastructure "deficit"  especially electric power.

Foreign currency will be scarce during a period when the country will need billions of US dollars to finance food imports (already a third of the population is being fed by international donors) and another crisis year looms for agriculture.

Emergency assistance will be needed to rebuild the health and education systems and to finance fuel and electricity imports.

Most serious of all is the void so often overlooked by businesspeople, investors and diplomats.

That void is the country's "soft" infrastructure – the institutions that keep a country functioning, the judiciary, the police, the public service rule of law, the public service, the media, the schools and health providers.

These have been systematically undermined and corrupted by the Mugabe government. 

Ten years ago, when Mugabe set out to "empower" his people by seizing privately-owned farmland and instructing his central bank to print trillions, quadrillions, of local dollars to foot the bill, Zimbabwe was blessed with above-average institutions for an African country.

Today, much of that institutional fabric has gone.

It will take decades to revive and replace.

Tony Hawkins is Professor of Economics at the graduate School of Management at the University of Zimbabwe and writes on African economics and business issues in the Financial Times.

Source:
Al Jazeera
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