Mugabenomics: Zimbabwe's predicament

Zimbabwe’s economy is collapsing under the weight of its fiscal deficits, hyper-inflation and economic policies controlled by political agenda. It is really not a matter of whether it is going to buckle; it’s a matter of when. So how did the economy plummet in to a dysfunctional, broken down state? And more importantly, what can be done to save it from crumbling?

For two decades, the fate of Zimbabwe has been solely in the hands of Robert Mugabe, the once popular liberation leader now known as a human rights abusing dictator in the west. During this period, the country has undergone many structural changes in its socio-cultural, political ,and economic fields. Its international image and foreign relations with its immediate neighbours as well as world community at large have suffered badly due to the high handed policies of Mugabe in utter disregard of the world opinion. All these changes are inevitably reflected in its economy.

From being a thriving economy relying largely on its agricultural sector, it has come to the brink of a collapse. Once it produced enough to feed the nation and be a potential bread basket for its neighbours, was the second largest producer of tobacco, and the grower of best cotton in the world . However it is now facing an economic meltdown described by world bank as the worst ever outside a war zone. The agricultural productivity for 2006-2007 is nearly 30% lower than what it was in 2000 which has left millions starving due to severe food shortages and over 80% of the population unemployed. Inflation has risen from 133% in 2004 to somewhere between 7600 %(gov. sources) and 15000% (independent sources) making basic commodities of life unaffordable for the common man in Zimbabwe. Four out of five of the 12 million people live under the poverty line and many rely on grain handouts for survival. It is estimated that about a quarter of the population has emigrated. HIV/AIDS is prevalent in 20.1% of its adult population thus further reducing the active work force while at the same time increasing the economic burden on the economy.

The cause of this economic crisis is predominantly attributed to the chaotic and violent land reforms involving seizures of farms owned mostly by minority white farmers for the so-called ‘ benefit of the general public of Zimbabwe', implemented by a corrupt government. These farms have been handed over to landless members of the black community . They have generally found their way in to the hands of veterans and supporters of Mugabe. This has been a transfer from willing, skilled and resourced farmers to those who either lack the will and have sold infrastructure, irrigation pumps and other agri machinery etc for quick liquidity and economic gains, or those who have the will but not the skills or do not have collateral resources. This has led to decreased capacity utilization aggravated by the monetary policies of the government.

But that is not the sole cause of the crisis. Economically incorrect decisions like the handing out of unbudgeted awards to the veterans of the independence struggle by Mugabe due to political expediency and the decision to send troops to republic of Congo from 1998-2002 have struck a severe blow to the economy. It is estimated that Zimbabwe spent around 13 million dollars per month on this war. The inability of the government to repay loans and hence defaulting on IMF loans means that Zimbabwe is no longer eligible for further loan. Human rights abuses and repression of people by violent means has resulted in isolation of the country and indifference of the international community. Over and above all this are the limited sanctions imposed by the US government and the EU.

Severe shortages of fuel, food and other essential goods have resulted in skyrocketing inflation. However the government refuses to devalue its currency realistically and by enough to control the escalating prices of inputs. This in turn has led to manufacturing debacle as more businesses are being shut down due to shortages of inputs and the high cost of imported inputs that are available.

Instead, the government has resorted to administrative measures to control spiralling inflation. However the price ceilings imposed by the government are economically inefficient and practically ineffective .These have led to further aggravation of the situation as firms now have to buy from alternative black markets at even higher prices. The subsidies provided by the government on fuel and other inputs to the farmers are exploited as many do not use subsidised items for production but sell them in the black market at substantial prices making immediate profits.

The official foreign exchange rate is ridiculously high and foreign exchange reserves of the country badly depleted. The current official foreign exchange rate has increased to 15 000 Zimbabwe dollars to one US dollar ,as compared to 1 Zimbabwe dollar to 1 US dollar in 2003. The demand for foreign currency is so high and its supply so limited ,that the black market traders are selling it to the highest bidder at rates like Z$300,000 to one US dollar! With the central bank now buying at the illegal market rates to pay its mounting debts for power and fuel utilities, it is increasing everyday. Thus prices of imported inputs which are already very high are ever increasing and with the price control on products introduced by the governments, more and more businesses are shutting down. This has resulted in the lowering of productive capacity utilisation from 60% to 25%which is expected to decline further. This in turn is fuelling further poverty and unemployment and emigration leading to further brain drain of much needed skilled workers in Zimbabwe.

To top it all the government has warned of a possible electric supply collapse and breakdown of water supply .Absence of clean drinking water has led to another break out of the water transmitted disease I-e cholera. The country is plummeting fast and the economy is in a nose dive with living standards hitting rock bottom. Zimbabwe is in dire need of international aid and relief to have any chance of economic survival.

So what should the government do? Or simply, what can the government do? It should first of all drop price control. Again, it should pragmatically devalue its currency and bring black market operations to a close by essentially letting the market do its job and determine the price of goods and the exchange rate.

Mineral resources are enormous potential wealth for Zimbabwe with large deposits of gold, nickel, platinum, coal and methane gas. But to exploit these and to increase the productive capacity, international investment of capital is essential. However it is unlikely to be forthcoming in view of the present unfriendly policies of the government and unstable political environment.
Another historically strong sector is the tourism industry which is suffering right now due to the violence, chaos, and human rights abuses etc attributed to this regime. Unless a better image of Zimbabwe is portrayed in this world, foreign currency inflows through this sector cannot be obtained.

Zimbabwe can not survive any longer without international support and aid. The Zanu-PF under Mugabe should co-operate with the SADC led by the South African president and undertake reforms to ensure free and fair elections. Such reforms will end the international isolation of Zimbabwe and help in providing the much needed economic assistance ,food aid and other relief to the starving population. The west also needs to lift its sanctions on food and humanitarian aid ,and subject to acceptance of the terms of SADC provide financial assistance to start the process of reconstruction.

But for some people, the most important and the only solution to this milieu is for Mugabe to go. According to economist Robert Nelson : ‘… the Zimbabwe economy will continue to go down the tubes until they get some political stability and, as long as Mugabe is there, that's not going to happen.’ That might not happen because the opposition is still disunited amongst itself and despite allegations of rigging against Mugabe in 2005 elections, his party is still in control. However, in the words of a Harare based analyst, ‘the big problem about Zimbabwe is that the one thing you can’t rig is the economy. When it fails, it fails. And that can have unpredictable effects.”
*Sources for quoted statistics: CIA fact book, BBC website, Zimbabwe Independent, and New York Times.