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Zimbabwe is staring at currency chaos again

Celebrating his 93rd birthday on Saturday at a lavish party in the Matopos Hills near Bulawayo, President Robert Mugabe made it clear: he is going nowhere and intends to fight next year’s presidential election.

The frontrunner to succeed him, vice-president Emmerson Mnangagwa, promised his continuing support, pledging that the Zanu-PF party “will rule forever”.

Many Zimbabweans, especially business people, hoped but did not expect that after 37 years in office the president would signal his intention to step down. They fear the economic consequences of a continued leaderless drift as the country faces its most severe economic challenges since dollarisation in 2009, which put an end to a decade during which per capita incomes halved.

Now, Zimbabwe is again staring down the barrel of currency chaos. One set of numbers says it all: at the end of 2016, the country’s commercial banks were holding $1.35bn in treasury bills — equivalent to 180 per cent of bank capital — issued by a government unable to pay its way either at home or abroad. The country appears to be facing another economic meltdown, scarily reminiscent of the lost decade to 2008.

Today, bank lending to government and its agencies totals 42 per cent of domestic credit — up from just 13 per cent when the ruling Zanu-PF party returned to monopoly control after the dissolution of the shortlived government of national unity in mid-2013. The central bank, which has no deposits of its own to speak of, virtually trebled its lending to the state to $970m last year.

The difference a decade ago was that the exchange rate for the defunct Zimbabwe dollar took the strain until its ultimate collapse in 2008. Inflation is not the problem now. After four years of deflation, consumer prices in 2016 were just one per cent above their 2011 level, partly due to the overvalued currency.

Since dollarisation, the currency has floated upwards with the US dollar, while that of South Africa, its main trading partner, has depreciated substantially. This, combined with weak international commodity prices and two years of drought, resulted in a trade deficit, averaging $3bn a year.

A large part of this gap has been closed by diaspora remittances ($750m annually), foreign aid and reckless short-term offshore borrowing. So much liquidity drained out of the economy last year that the authorities were forced to resume printing their own bank notes — bond notes, of which about $100m are in circulation.

The authorities insist that their bond notes and the electronic dollars locked into the banking system are identical in value to US dollars. They are not. Depositors are denied ready access to their money with banks dispensing daily amounts of $50 to $100, half in US notes and the balance in bond notes. On the Zimbabwe Stock Exchange a gap of 25 per cent has opened up between the Harare and Johannesburg valuations of dual-listed Old Mutual shares, meaning that the US dollar in Zimbabwe is seriously overvalued. Adjusting for inflation differentials, it could be as much as 75 per cent.

Business leaders and some bankers see a switch of the country’s currency from the dollar to the rand as a possible solution. Given the debt overhang of $5.2bn in international arrears, however, a shift to the endemically weak rand seems an unpromising solution.

The government hopes that the “Lima Agreement” of 2015 for the clearance of $1.7bn of arrears to the Bretton Woods institutions and the African Development Bank, will come to its rescue. This agreement has the backing of some western governments, notably the UK and Brussels, as well as multilateral lenders, but Zimbabwe has been unable to source the required bridging finance.

Economists and opposition politicians question the viability of still more international and domestic borrowing by a country already deemed by the IMF to be in debt distress.

Yet it seems that western governments — with the exception of the US — and the Bretton Woods institutions have learnt little from past fruitless interactions with the Mugabe government.

The writer is the FT’s Harare correspondent