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Zimbabwe’s cash impasse

By Patrick Smith
Posted on Friday, 28 September 2018 09:43, updated on Monday, 11 March 2019 18:45

Patrick Smith, Editor-in-chief of The Africa Report, gives his opinion on a political deal to break Zimbabwe's cash impasse

Over morning coffee, Zimbabwean academics and international observers were arguing how the latest political explosion had torpedoed the government’s plans to win legitimacy, just three days after the 30 July elections. From the lobby at the Meikles Hotel in central Harare, one of them beckoned: “Welcome to the war zone!” The greeting was only half-humorous.

The previous day, we journalists had been covering a demonstration by some 3,000 opposition activists, protesting at delays in the release of results for the presidential elections.

It had started well enough. On some streets, police and demonstrators were shaking hands. Minutes later, everything changed. A small contingent had peeled away from the main cohort of protesters and ran towards the headquarters of the ruling Zimbabwe African National Union-Patriotic Front, a hundred metres from the electoral commission.

Some started hurling rocks at this symbol of the ruling party’s dominance. As guards started firing over the wall, another group broke into the car park to smash up party vehicles, setting one ablaze.

Then more gunfire. This time from men in military fatigues, some with balaclavas and bandanas like militia fighters, shooting with high-velocity weapons into the crowds. Down the street, more soldiers descended from an army lorry, ran along the pavements wielding rhino whips and started laying into passers-by. Three hours later, six Zimbabweans lay dead and 19 more had been rushed to hospital.

Role of the military

That deadly afternoon shattered the prospects that the election, whose fairness was already under heavy criticism, would usher in a promised land of loans, investment and the country’s triumphant re-entry into the international system. The government’s response – blaming protesters for the violence and rounding up oppositionists – hardened sentiment. Although observers from the African Union and China gave the elections a comfortable pass mark, arbiters from the European Union and the United States demurred. Washington then announced fresh sanctions.

The results giving President Emmerson Mnangagwa 50.8% of the vote did nothing to change those positions. The sight of police breaking up an opposition press conference and then being condemned by Mnangagwa for doing so raised doubts over the government’s coherence – and the role of the military.

The chances of a new economic order after the elections were sprinting, rather than slipping, away. IMF managing director Christine Lagarde tells The Africa Report that the system had been on standby to work with Zimbabwe: “The support of large numbers of institutions is conditioned on free and fair elections […] if that was confirmed, then we would stand ready to engage as soon as possible.”

The technical aspects would not be too difficult, she adds: “They paid off their arrears with us at the IMF […]. My team tells me they still have reasonably solid institutions. They have had lots of trade missions in the last few months to figure out what kind of investments would be available in mining and farming and so on.”

As Lagarde points out, Zimbabwe has its international cheerleaders. Just after the elections, Hafez Ghanem, the World Bank’s vice-president for Africa, said Zimbabwe could become an upper-middle-­income economy within a decade, boosted by its millions of well-educated people and rich mineral resources.

For now, that possibility is on hold. Without a political consensus on the election, the government will struggle to relaunch the economy. That means paying off arrears of $1.7bn to the World Bank and African Development Bank, and restructuring debts of more than $14bn.

It also needs an infusion of cash, around $2bn, to shore up the monetary system. After adopting the US dollar and abandoning the Zimbabwe dollar a decade ago, the Reserve Bank put its own twist on dollarisation. As the economy’s exports and investments were not generating enough US dollars, the Reserve Bank started issuing bond notes for internal trading, a surrogate currency known as Zollars.

This has created at least three new currency systems, each with its own exchange rate. No one believes the government’s insistence that a Zollar is worth the same as a US dollar, and the arbitrage between the two is growing sharply, according to a senior banker in Harare. Money supply increased by 43% in 2017, while the economy grew just 3.7%. Without better management and more hard currency, this creation of money will lead to a monetary meltdown, the banker predicts.

Hurting Zimbabweans

“Right now, it is in no one’s interest to state the obvious,” he adds. “That is, that the Reserve Bank can’t cover its liabilities.” Credits from outfits like Afreximbank in Cairo have helped shore up the currency this year. Others are reluctant to jump in without an IMF backstop.

Of the three mooted options – stick with the status quo and hope for new capital inflows, announce a massive Zollar devaluation or join South Africa’s rand zone – the government looks stuck on the first. Many have been advising it that the political risks of a devaluation or joining the rand zone are simply too high. But others are calling on Mnangagwa to take another sort of risk and set up a power-sharing government with an agreed agenda to reform the public service and a minimum programme for economic and social recovery.

Within days of being declared winner, Mnangagwa said he saw no reason to form a coalition, given his party’s resounding victory. Similarly, Nelson Chamisa, the presidential candidate for the Movement for Democratic Change, rules out any form of power-sharing, given his insistence that the election was stolen. The consensus between the two main protagonists is that there is no consensus.

In the end, economic forces may suggest otherwise. If questions about its legitimacy stop the government from bringing in the capital to break the debt and monetary impasse, a power-sharing government could change the dynamics. It would be unpopular with activists on both sides, but it could help trigger a more positive international financial response. Without that, the immediate prospects are of a slow-motion economic crash as the political fight rages on, which will hurt most of all the millions of Zimbabweans who have waited so long for change.

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