NEWS ANALYSIS: Pegging currency to dollar costs Zimbabwe

November 11, 2015, 4:43am


The International Monetary Fund has cut its 2015 growth forecast for Zimbabwe almost in half to 1.5%. Picture: THINKSTOCK

By Mike Cohen, Business Day Live

ZIMBABWE freed its economy from the nightmare of hyperinflation by dumping its currency and adopting mainly the US dollar. Six years on, the economy is back in crisis.

Deflation is hindering spending and investment, factories are closing and the government is struggling to find money to pay its workers.

The dollar’s appreciation has made imports cheaper, exports more expensive and fuelled a cash crunch, said Mark Ellyne, an economics professor at the University of Cape Town. Laws adopted in 2008 that compel foreign-and white-owned companies to sell at least 51% of their shares to local black investors have compounded the problem by deterring investment, he said.

"The dollar strength really works against them," Prof Ellyne, who worked at the International Monetary Fund (IMF) for 25 years, said by phone. "They’ve made a wrong choice about the currency and they’ve not opened up enough. They should have tried to do a deal with SA to use the rand."

Zimbabwe imported goods worth $2.5bn from neighbouring SA last year, more than from all its other trading partners combined, according to data compiled by Bloomberg. Their economies are further entwined by the estimated 2-million Zimbabweans who migrate to find jobs in Africa’s most industrialised economy, according to United Nations estimates.

Zimbabwe’s currency regime means its factories cannot compete with their South African and Zambian counterparts, said Busisa Moyo, president of the Confederation of Zimbabwe Industries, who has called on the government to enact laws to cut salaries and utility prices. The rand has slid 26% against the dollar since the start of last year, while the Zambian kwacha has dived 60%.

Zimbabwe’s economic meltdown dates back to 2000 when militants backed by President Robert Mugabe’s government began seizing white-owned commercial farms. Inflation soared as the central bank printed money to enable the government to pay its bills. The Zimbabwe dollar was scrapped in early 2009 and a basket of currencies, including the dollar and rand, became legal tender. Today all pricing and about 90% of trade is in dollars.

"There’s no immediate plan to return to the Zimbabwe dollar," Finance Minister Patrick Chinamasa said. "We’re tied into the multi-currency system and our focus is on creating growth."

When hyperinflation peaked, Zimbabweans had to pay for restaurant meals before they ate and quotes from repairmen and businesses were valid for 15 minutes. With a single egg costing more than 1-billion Zimbabwe dollars, shoppers carried money in suitcases and rucksacks. The experience still jars and few Zimbabweans favour renewed state control over the monetary system.

When the central bank introduced locally minted so-called bond coins to alleviate a shortage of US coins, they were widely rejected, with most people opting to take change in candy or pens instead.

"I doubt anyone will ever trust them with money again, not after 2008," said Fred Nyikadzino, who sells building materials in Harare. "It’s better we struggle now with a US dollar they can’t control than let them print trillions and trillions of worthless money."

More than 80 Zimbabwean firms shut last year, a trend that has continued this year, and just 34% of the country’s manufacturing capacity is being utilised, said Mr Moyo. Consumer prices have fallen every month since March last year, dropping 3.1% in September from a year ago, without boosting sales volumes. About 700,000 Zimbabweans have formal jobs, the lowest number since 1968, government data show.

The dollar forces fiscal discipline on the government and is "a red herring" when it comes to assigning blame for Zimbabwe’s woes, according to Steve Hanke, professor of applied economics at Johns Hopkins University, who together with research associate Alex Kwok calculated that at the peak of hyperinflation, prices were doubling every 24 hours.

"Companies’ lack of competitiveness in Zimbabwe is largely influenced by the difficulties created by the government’s regulatory burdens," he said. "No-one knows from one day to the next what the rules of the game are and how secure their property rights will be.’’

Zimbabwe ranked 171st out of 189 countries in the World Bank’s 2015 Doing Business survey, which considers factors such as how easy it is to start a business, pay tax and enforce contracts. Public servant wages swallow about 83% of state revenue. In August, the IMF cut its 2015 growth forecast almost in half to 1.5%.

Bloomberg