Tag Archives: ZDERA

Zimbabwe’s latest crisis: it’s the economy – and politics, stupid!

The images of economic crisis in Zimbabwe are all too familiar. Queues for petrol and cash, commodity hoarding, parallel markets in currency, rising inflation and so on. It all seems reminiscent of the dark days of the mid 2000s, in the build-up to the full-blown crisis of the hyperinflationary collapse of 2008. This was not meant to be how the much-hailed second republic started out.

Bill Clinton’s 1992 election slogan, ‘it’s the economy, stupid’ does ring true. Years of economic mismanagement, deep corruption and failure to invest, combined with sanctions, credit embargoes and investment freezes, have taken their toll. But the current crisis is also to do with politics, both domestic and international.

The dimensions of the economic crisis

Tony Hawkins, an economics professor at the University of Zimbabwe, recently gave a widely-circulated talk to the British Council on the economic travails of Zimbabwe. There was much to agree with in his summary of the situation.

The economy is uncompetitive, he argued, not helped by the appreciation of the US dollar by 17 percent since dollarization, the huge loss of value of the South African Rand and rising oil prices. Estimated 14% revenue increases from tobacco, gold and other minerals are offset by a massive hike in state expenditure, up 57%, exacerbated by election commitments to public servant wage hikes. The budget deficit has ballooned to $3.3 billion, with a projected trade gap of around $2.5 billion.

What’s more, he said, the total national debt now stands at a staggering $22 billion, now more than the GDP. Government borrowing continues to grow, crowding out the private sector, and putting pressure on available finance for investments, as people seek cash on the (expensive) parallel market. Inflationary pressures are also increasing dramatically therefore, with money supply far exceeding (formal) GDP growth.

But, despite the value of this description (repeated of course in numerous assessments by the IMF, the World Bank and other economists), his diagnosis of causes was only partially on target, and his solutions missed crucial dimensions.

Causes were laid largely at the door of domestic economic policy (or lack of it) and corruption by the ruling party. This, as is well documented, is a key part of the story. From Gideon Gono’s use of the reserve bank as a political tool in the ‘casino economy’ years to the massive expropriation of diamond resources, both show how the Zimbabwean economy has been destroyed from within.

This has not been the only story. The sanctions imposed following the land reform of 2000 took their toll too. While only targeting select individuals, and withdrawing aid from government led programmes, this signalled diplomatic disapproval from the West, and it had a major impact on patterns of economic support.

Aid programmes still continued but under a humanitarian label channelled through NGOs. But much more significant was the withdrawal of international finance and credit lines. This had a devastating impact and, even if not directed by official sanction policies, were their direct consequence. Despite the easing of diplomatic tensions in the post-Mugabe era, and the charm offensive that Mnangagwa has been engaging in from Davos to New York, the situation has not fundamentally changed.

Hawkins does point to the problem of ZDERA (the Zimbabwe Democracy and Economic Recovery Act of 2001, amended this year) in particular. This is the US law that prevents the US government supporting Zimbabwe at the IFIs, without implementing a set of political reforms. In the coming months, this will likely prevent the US rep at the IMF backing a recovery plan, making the position of others on the IMF board crucial if any changes to support Zimbabwe’s recovery are to be realised.

Reforming the economy

The new finance minister, Mthuli Ncube, knows all this, but does he have the leeway to change course? He is severely hampered by the political legacy of sanctions and other ‘restrictive measures’, and deep distrust across international actors. However, there have been some good signs. His interviews with Bloomberg and speeches around the world have mostly been impressive, and suggest that he is committed to a major economic restructuring.

Some of this will be tough, and will be highly political. A test of the new government’s commitment will be how far he is allowed to go. Already attempts at introducing taxation measures have resulted in protests. What happens when he is forced to cull the public sector, massively reducing the salary bill, or overhaul the currency system, which benefits those dealing on the black market, including powerful individuals well connected to the political system?

Clearly the stop-gap measure of a “multi-currency” environment that followed the abandonment of the Zimbabwe dollar and the adoption of the US dollar is no longer working. Local ‘bond notes’ were supposed to be backed by external hard currency finance, but are clearly no longer, and are fast losing value. Stalling the massive flow of hard currency out of Zimbabwe is vital, and this means ending the pretence of equivalence between greenbacks and bond notes. Sticking to the US dollar in a period when US protectionism is boosting its value is risky too, as it makes everything absurdly expensive. But setting up a new currency in such straitened times is not wise either, given the low levels of confidence in the economy.

What to do? Given the dire experiences of structural adjustment from 1991 – which in many ways set the scene for much of Zimbabwe’s current malaise – making the case for IMF stabilisation intervention, combined with a HIPC-style debt relief package, with all the raft of expected conditionalities does seem rash. But there really doesn’t seem to be any other option currently. The Chinese are fed up with Zimbabwe given its failure to pay back loans in the past, and the ‘socialist solidarity’ line has worn thin. Reluctantly, this may be the only route.

The centrality of the rural economy

Assuming a political route to reform can be created, it therefore matters a lot what such reforms look like, and how they are implemented (lessons from Greece and others of course). Where I fundamentally part company with Hawkins’ analysis is his disparaging rejection of the importance of the rural economy. Like so many conventional economists, he focuses on the urban, industrial sector, forgetting that this is dependent on a wider economic system that remains substantially small-scale, informal and rural. The distinctions between ‘formal’ and ‘informal’ economies in Zimbabwe are irrelevant today: most of the economy is ‘informal’, and that’s where livelihoods are made.

In the rural areas this is especially so. And, as we have shown in our research over many years, this is vibrant, growing and generating employment in significant ways, particularly when linked to land reform areas that are producing surpluses and creating spin-off linkages in local economies. It is far from dead, as Hawkins suggests, but it is different to what went before. This is not backward-looking rural traditionalism, bound by archaic cultural norms, as Hawkins seems to suggest, but the new economy; one that everyone must get used to and support. For sure, it is the ZANU-PF support base, and the reason they won the parliamentary elections, but that makes it even more important that the government gets its reforms right for rural people, as well as the urban middle classes.

The small steps towards a positive dynamic of rural growth spurred on by land reform however stalls dramatically when the wider economy is in crisis. With no liquidity, investments dry up, and with a lack of credit, the financing of new operations cannot occur. If inflation kicks in, as it is now (some estimate that annual inflation is touching 50 percent already), then the value of goods is uncertain, and economic transactions are risky. The result is that the economic dynamism ceases, and livelihoods are affected up and down value chains, from agricultural producers to traders to processers to wholesalers to retailers and consumers.

This is what happened in the mid-2000s, and again is what is happening now. But rather than dismiss rural people and areas as economically backward, somehow culturally unable to engage with a modern economy, policymakers and economic advisers need to appreciate the potential of the agrarian economy, and encourage investment. Simply wishing an industrial revival without a core agrarian productive base supporting the mass of the population is foolish, especially in Zimbabwe’s context, as a small economy operating in a highly competitive global environment.

Wider stabilisation, debt write-offs and addressing inflation and currency instability is vital at the macroeconomic level and must be central to Mthuli Ncube’s agenda. But his next step must be to set up the type of investment strategy that allows a dispersed, largely informal economy to thrive, and contribute to growth and employment in multiple ways for long-term, sustained and equitable recovery.

Only then will links be made that allow the industrial and service sectors to thrive, and taxation and so government revenue raising to be applied. The post land reform economy does not look like that of the 1990s in the earlier adjustment era, or the post UDI sanctions period in 1980. Big ticket ‘modern’ investments in agriculture, tourism, maybe even some industries, will be important, but they must not undermine or take attention away from the key challenge, which is supporting the real, predominantly rural, economy where most people make their living.

It’s politics, stupid!

The on-going negotiations with the IMF and the wider diplomatic and donor community are of course not just about economic restructuring, investment and financial prudence. They are also (of course) about politics. With Nelson Chamisa and the opposition MDC still not recognising the results of the elections, their lobbying of western governments continues.

Their strategy is unclear, but it seems to be to encourage the US in particular to maintain sanctions and the ZDERA law, with the aim of extracting political concessions for the long-term. You can see the rationale, but the consequence is that the economy is nose-diving and people are suffering; if not from cholera due to lack of investment in urban infrastructure, certainly from growing economic hardships, even if this is only queuing for petrol at night. This may backfire, with the opposition seen as holding the country hostage, undermining recovery for political gains.

Calls for demilitarising the state apparatus as part of conditions are appropriately central to many demands. The latest bogey-man for the international community is of course the Vice President General Chiwenga. But, with ZANU-PF, despite the new, PR-branded version that President Mnangagwa is projecting, a securitised state is likely to persist, even after the army has returned to the barracks or swapped uniforms for suits. A technocratic-military state is a feature of the current dispensation, and by some seen as a positive route to implementing a state-led (aka ‘command’) developmentalist policy, in the mode of Kagame in Rwanda or previously Meles in Ethiopia.

Where next?

There are divisions amongst the western diplomatic community on how to move forward. Some take a pragmatic stance and argue that a stabilisation bailout will create stability, and allow the economy to function, arguing that conditions for future elections and a deeper embedding of (western-style, liberal) democracy will emerge only when the country is not in crisis mode. Others make the case that a crisis of legitimacy following the elections means that this is the moment to exert pressure on Mnangagwa and exact the maximum concessions in favour of the opposition’s stance. Economic crisis is a price worth paying if political reform emerges, goes the argument. Within ZANU-PF and the MDC, as well as commentators not linked to any party, all shades of opinion exist.

What all agree is that a return to 2007-08 is not desirable, and that action to avert this needs to happen soon. And I would add: a focus on supporting the informal sector and the agrarian economy – and the linkages beyond – is vital to any way forward.

This post was written by Ian Scoones and this version first appeared on Zimbabweland.

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The politics of reform in Zimbabwe

chinamasa-02

Last month two major reports came out on economic and political reform in Zimbabwe. The first from Chatham House, looking at economic reform and the question of re-engagement by international actors, and the second, from the Institute for Security Studies, looking at similar themes, but focusing more on the political challenges.

They come to rather different conclusions. The Chatham House report argues strongly for re-engagement by the West and the International Finance Institutions. The ISS report is more sceptical, arguing that Zimbabwe’s reforms could be seen more of an exercise in pretence, and may help prop up the regime.

We have heard these arguments before. The pragmatists, arguing for engagement with the inevitable response that this is appeasement and those arguing for a major overhaul, but without any clear plan for how. Neither of these reports fall firmly into these stereotypes. These are both written by commentators with deep knowledge of the situation.

However, I found the Chatham House report definitely the most convincing. The authors are sanguine about the challenges, but realistic about what needs to be done. Their headline message is that “International and regional governmental engagement does not guarantee the success of long-term reform, but continued isolation will almost certainly lead to the failure of reforms to take hold”.

They point to the very real shifts that have occurred in the last year or two, often not accounted for in commentary on Zimbabwe. In part this is a response to the desperate economic situation, but also a sense of greater realism amongst elements of the ZANU-PF elite. The Chatham House report highlights the words of Patrick Chinamasa (pictured above), who has been leading the negotiations with the IFIs, among others. In a London speech in July he said:

“We are doing everything in our power to improve the operating environment in Zimbabwe to attract foreign direct investment. What the country needs right now is capital – new money. The debts and liabilities are there, and we need a strategy that can make the economy grow. And for the economy to grow we need foreign direct investments, which is why we are involved in a strategy to change the operating environment and we’ve moved mountains in this regard.”

The economic situation is certainly dire. The appreciation of the US dollar has made Zimbabwe’s exports less competitive. Manufacturing has declined yet further, along with the tax base, and so government revenues. This means paying civil servants (83% of public expenditure) is more and more difficult. Attempts to improve liquidity through creating treasury bills, bond notes and the rest have met with protest. Banks have gone bust, cash is in short supply, and hard currency is leaving the country in large amounts as the country becomes the region’s ‘bureau de change’.

Continued restrictions by the US government under ZDERA (the Zimbabwe Democracy and Economic Recovery Act of 2001) means currency negotiations with the US Federal Reserve are prevented, and the economy must rely on exports, remittances, foreign investment and credit lines, all of which are under pressure. Confidence is at a low ebb, as political turmoil persists, and this in turn puts off investors, who fear yet more disruption around the next elections, and as a result of any succession battle for the presidency. The Chatham House report lays out the details, with some stark facts and figures (although as ever misrepresenting the data on food security – see recent blogs on this).

From liberation to liberalism: what prospects for reform?

This is the context that is forcing change. Chinamasa represents what the Chatham House report authors call a “transition from hard-line ‘patriotic liberationism’ to a more pragmatic economic liberalism”. The ISS report agrees that Zimbabwe has “the technical competencies to deliver” but points to the political challenges. The report observes: ”political support has been partial, inconsistent and largely tepid, underscoring a dawning reality that the imperatives of retaining ZANU-PF hegemony, the inevitability of Mugabe leaving office and the related factionalism around succession fundamentally stifle prospects for reform and, by extension, narrow options for engagement”. It goes on: “engagement is selective, policy statements often incoherent and serious questions remain about government’s commitment to deliver”. It concludes pessimistically: “the course appears set for continued economic decline, internecine political machinations and growing potential for violence, resistance and repression”.

There are good grounds for such pessimism, but a more rounded examination, as contained in the Chatham House report, shows that there is more going on than many give credit for, and that the political struggles over what reform means are more complex. To date, the government has certainly made important strides towards IFI compliance, under extremely constrained circumstances. This has been focused on the public finances, including reforms of the banking sector, attempts at public wage restraint, parastatal reform and privatization, efforts to inject greater transparency and accountability into the mining sector, and implementation of Constitutional provisions around land compensation and audit. Not all of these interventions have been successful, and there have been popular and political backlashes. Many – rightly – remain cynical. But there has been a surprising energy and commitment. This is about economic, and crucially, political survival.

However, as the Chatham House report notes, such reforms are only the beginning. Many international players want to see more. For example, “A deep wage cut across the board, clarity and consistency on indigenization, and the finalization of 99-year leases” will be required, plus “measurable democratic reforms, including the alignment of legislation to the 2013 constitution, abidance to the rule of law and adherence to human rights norms”. This may all be a tall order, particularly in the febrile political atmosphere in the run up to the 2018 elections, meaning many in the international community and the wider opposition will remain unconvinced.

Currently Zimbabwe is in a bind. The constraints on both international public and also private investment are stifling any prospect of economic recovery. Many investors suspect that reforms will be affected by party political dynamics. As the Chatham House report observes: “Attempts to attract investors are hampered by the lack of apparent planning for Zimbabwe’s post-Mugabe political leadership, and a prolonged succession battle could be extremely risky, not just for the party, but also for the country”.

Despite these qualifications, the Chatham House report is upbeat. It notes: “even in a context of severe economic constraints – and despite some overlaps between party and government issues – the government continues to function, and is supported by a professional, albeit eroded, civil service. There is still an operational distinction between party and government, and the divisions in the party have not fully replicated themselves across the state. Zimbabwe’s institutional capacity is fairly robust. Parliament remains an important nexus for bipartisan debate and scrutiny of elected officials”. These are important observations, and often forgotten (see an earlier blog on persistent bureaucratic professionalism).

Political alliances for reform

If technocratic and institutional capacity is not lacking, political incentives for reform often are. Here the Chatham House report again offers a nuanced analysis. It points to two opposing forces, cutting across party lines. First, there are those who have incentives to support reform. This includes many in ZANU-PF and the military who have strong business interests. They are driving the reform agenda, and include many in the upper echelons of the party, as well as new opposition groups (most notably Joice Mujuru and People First). The military-business elite is crucial here, as they may be the ultimate arbiters in the succession battle. With revenues from the Marange diamonds drying up due to new regulations and reforms, and other patronage networks in decline, as the Chatham House report notes, they are likely to be vested heavily in improving the business environment, and so ally strongly with reformers in the party, notably Vice President Emerson Mnangagwa.

Others are implacably opposed to reforms, seeing these as an imperialist imposition. There are those in the G40 group within ZANU-PF who make this nationalist-populist argument. According to Chatham House, they are: “sceptical of economic liberalization and re-engagement, particularly with the Bretton Woods institutions, as they fear this will mean the end of ZANU PF’s historical ideological objective to create a de facto one-party socialist state with a ‘captive’ or ‘token’ opposition”. While anyone with a memory of ESAP has a right to be cautious, the need to revive the economy is also apparent to anyone.

There are those in the opposition parties, supported especially by diaspora groups, who argue strongly against re-engagement too. But for different reasons. They are relaxed about a liberalisation stance at the centre of reforms and advocate free market approaches, but feel that the international community is letting the regime off the hook. More chaos, more decline, they believe will make the transfer of power easier, at or before the 2018 elections. If the opposition had a vision and an organisational base, such a stance might be credible. But accepting continued suffering for unlikely political gain, is in my view highly  irresponsible.

The Chatham House report therefore calls for re-engagement, and a phased approach to reforms, recognising the limits of alternatives, and the dangers of not doing anything:

“The interests of the ruling party, of the citizens of Zimbabwe and of international stakeholders are not mutually exclusive. There is little doubt that one of the main incentives behind the current government’s apparent commitment to the reform agenda is party survival. But if this means measures to achieve a stronger economy and better livelihoods, there should be tangible improvements in social and economic rights – and maybe, in time, more space for promoting civil and political liberties. Other options have not worked. The opposition, for its part, is in a fractured state, and it is not clear whether any strong alliance will be forged before the next elections”.

Failing to engage, and persisting with outdated sanctions measures (the report in particular fingers the US’s ZDERA restrictions and Canada’s stance), could be disastrous, not only for Zimbabwe but for the region as a whole. The report argues “Avoiding renewed economic collapse in Zimbabwe is important for Southern Africa, especially at a time when economic resilience is weakening elsewhere in the region.”

I agree, which is why a pragmatic if politically-challenging way forward must be found. The Chatham House report certainly offers valuable pointers, if not solutions, and is well worth reading.

This post was written by Ian Scoones and appeared on Zimbabweland

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