The root causes of the fiscal and monetary crisis in Zimbabwe

By Eddie Coss

Since Zanu PF resumed full control of Government in 2013, Zimbabwe has been sliding slowly, but steadily downhill in both fiscal and monetary terms. I estimated the GDP in 2013 at $17 billion based on the total value of cash collected from our local tax base. Today my estimate is $14,6 billion based on the same measure and this is supported by the Ministry of Finance. That is a 15 per cent decline in our gross economic output in 3 years.

Eddie Cross
Eddie Cross

In 2013 we had no sign of any shortages of cash in the system – imports were on open general license and all goods were in free supply. Today cash withdrawals are down to a tiny amount each day or week and stringent import controls are back and shortages are manifesting themselves all over the economy. Exports remain stagnant or below the level achieved in 2013 and FDI and Remittances are also down significantly.

What has gone wrong?

The first thing that happened immediately after the elections – virtually in the first two months, was a near total collapse of confidence. Put bluntly the markets voted against the new Government. The stock market fell 30 per cent as investors – largely from abroad, withdrew $1,5 billion from the stock exchange. Then depositors withdrew a billion dollars from the Commercial Banks and suddenly, after increasing by 14 times in 4 years, from $280 million in 2008 to $4,2 billion in 2013, tax revenues, across the board declined, falling from $4,3 billion to $3,4 billion in 4 years.

The near total collapse of market confidence has continued unabated and stocks are now only a third of what they were in 2013. There are no signs of any return of confidence and if people could get their funds out of the banks, virtually every bank in Zimbabwe would face liquidation today. As it is, a third of all banks have closed their doors since 2013 with a combined loss of many hundreds of millions of dollars. This has destroyed whatever is left of market confidence in the banking system.

In a desperate effort to halt the bleeding, the State has imposed harsh restrictions on cash withdrawals and imports. They have floated a new currency and it is rumored that they will shortly issue larger denomination notes. In this case the new currency will take over, virtually completely, as the local means of exchange for cash. At the same time, the budget deficit has ballooned from a small cash surplus in 2012 to a deficit in 2016 of $1,4 billion in a budget of $4,8 billion or nearly 30 per cent, a completely unsustainable figure in any country.

In the latest figures from the stock exchange Old Mutual shares have risen to a premium over the same shares in South Africa and London of well over 50 per cent. In effect this means that balances held in Commercial Banks and in Government stock, has been devalued by half by the market. In effect this means that some $6 to $7 billion has simply vanished this year and every Zimbabwean and company is that much poorer as a result.

After holding steady for a number of years, our total national debt, both local and foreign has increased by two thirds from about $9 billion in 2013 to $15 billion today. Interest charges on these borrowings are already beyond our ability to pay and any default on domestic debt will have immediate and grave consequences.

While the immediate collapse of confidence after the elections was the initial cause of this spectacular collapse of the formal economy, the continued decline in our economic and monetary affairs needs further analysis.

I sit on the Budget Committee of Parliament and in the past year, only the Confederation of Zimbabwe Industry (CZI) has stated that the basic cause of our recent problems has been the unsustainable domestic budget deficit. Why other private sector agencies have failed to identify this and continue to point to consequences rather than causes is a mystery to me. But there is no doubt in my mind that it is the budget deficit that is the main driver of the present crisis.

The causes of this crisis are in three parts:, the rising cost of employment in the Civil Service; the decline in State revenues; and the failure by the State to restrict expenditures to fit their income.

At Independence we had a Civil Service of 68 000, the Service was highly professional and a policy of paying salaries at about 80 per cent of the private sector meant that the Service attracted top talent and was, by and large, completely honest. Corruption was at very low levels. Today we have a Civil Service that may exceed 400 000 and it continues to grow. As a result the cost of employment of the Civil Service has risen from perhaps 30 per cent of revenues in 1980 and 60 per cent in 2012 to over 100 per cent of revenues today.

At the same time, revenues have declined by about $200 million a year or 5 per cent, since 2013. This has resulted in the State moving from a small surplus each year from 2009 to 2012 to a significant deficit in 2013 and the 30 per cent deficit in expenditure in 2016. This is unlikely to come down significantly this year. On top of that the Government has completely failed to cut its coat to fit the cloth at its disposal. Within weeks of taking power in July 2013, State expenditure rose by $600 million to $4,8 billion and it has remained at this figure for 4 years despite the steady decline in revenues.

The State deficit has had to be financed and the way the Government has done this, is perhaps the next major problem. They have had no choice but to borrow from the private sector and to strip all State Enterprise of any surplus funds they might be holding. All Commercial Banks and many companies now hold massive amounts of their so called “liquid assets” in the form of Government paper of one kind or another. At the same time they have allowed the State to build up its debt to other agencies so that today several billion dollars of domestic debt exists which is not yet taken into the State balance sheet.

This has resulted in two developments – a tightening of credit to operating companies and agencies and the conversion of cash balances into assets that are at best illiquid and at worst, worthless paper. Treasury Bills are being discounted at up to 40 per cent and it is now likely that interest on these financial instruments will not be paid as the State crisis deepens. The major public symptom of this cash crisis is the decline in maximum daily withdrawal limits from $10 000 a day in January 2016, to $50 to $100 a day today.

These problems in the banking industry are being disguised by the growth in what economists are calling “RTGS Dollars”. These are US Dollar balances that are in fact simply book entries which have little or no chance of being liquidated as real dollars any time soon and maybe never. While consumption is being strangled by this shortage of real money in the market, the productive sector is being strangled by the shortage of hard currency for imports. If they proceed with the decision to issue $10 and $20 “Bond Notes” it will ease the cash shortage but will raise inflation rates and drive what remains of our USD balances underground.

  • Eddie, Knock some sense out of these thick headed politicians

  • shasha

    This guy knows what he is talking about. He only left out Mugabe as the pivot on which all our economic problems turn

    • Nomusa Garikai

      But he clearly did not know why he was in the GNU for because after five years MDC failed to get even one reform implemented.

      He is in the party called Movement for Democratic Change but after nearly 20 years the party cannot name even one democratic change it has brought!

      • shasha

        You are right but zanu pf would never reform itself out of power and all opposition parties combined will never succeed in doing that.

      • Cc

        MDC does not Govern Zim!!!!!!!!!

  • Joe

    One of the very few articles I’ve completely read and completed. Hate or love the white men, we are letting our race down. Our leaders have failed us, the greed is undispicable. They have ransacked the country, But not to cry, ZIMBABWE IS BIGGER than any of this or them.

    • Nomusa Garikai

      You are not one of the 90% out of work, you would be crying then!

  • Nomusa Garikai

    This is a nonsense argument we keep hearing from these opposition people. The people of Zimbabwe have accepted that Zanu PF is corrupt and incompetent and so MP Cross is not telling us anything new with all his articles talking about how incompetent and corrupt Zanu PF is.

    The people have risked life and limp to elect MDC leaders so they can implement the democratic reforms designed to stop Zanu PF rigging elections. MP Cross and company had five years during the GNU to get this done, they failed to get even one reform implemented. Why?

    Eddie Cross must tell us why MDC has failed to implement any reforms during the GNU and then since the rigged July 2013 elections? Now MDC leaders are talking of contesting next year’s elections still with not even one reform in place! WHY?

    Answering the questions on reforms will help us get rid of Zanu PF than all this talk about the wrong things Zanu PF is doing. As long as we do not do something to get Zanu PF out they will remain in power and missing up all our lives!

  • Sabhuku

    I even spoke about this today that all African countries except one or two are poor because they are not producers. China is rich because they produce and sell to other xcountries and if we dont sell to other countries mahwani. we used to sell beef abroad, we used to sell cars to SADC (Willowvale Mazda) but now hapana dhiri zvatodhakwaso. We chased the farmers without a smooth transition and it killed our ability to produce and earn some foreign currency. Its simply a matter of tiredness of our politicians. Lets move away from depending on mines because the resources are perishable and create real value in processed cotton (textile – through reviving david Whitehead), and lets create employment through going green. Lets mount Power generation points from Vic Falls till Kariba 7 points till Kabora Basa so that we can generate more than enough for export and lets develop our towns like Vic Falls so that we can create employment for our people. Lets shift from producing primary products like maize and diamonds to producing secondary and tertiary products like Mafuta cooking oil, polished diamonds and processed steel and platinum etc. Just those things can take us far izvi zvekuti nyika inoruniwa ne Doro (delta) nekufona (Econet) is not sustainable at all. We will shut down very soon as a country. these conditions even if they rig next year will not go away. Ple want solutions and to fend for their children and have a future with hope for their children.

    • Chiratidzo

      Just look at France they have a 39 year old president. We are fielding sekuru 93 years old as our presidential candidate. What do we think will change? The same sekuru who has failed to create jobs the same sekuru who has presided over the demise of the economy. But where are all the young people gone. Churning out graduates by the hundreds economists accountants mbas phds all to serve the diaspora! Zvakaoma and we all blame zanupf mdc mai mujuru etc etc and mock those who want to enter the presidential race as outsiders. We are our own worst enemies!!

  • This puts reality into perspective

  • Mukanya

    CORRUPTION is ZANU PF’s blueprint not ECONOMICS!!!!