The GNU stabilized the economy and both GDP and revenues to the State rebounded dramatically. This is shown in the following table:
This table shows that revenue to the State grew by a factor of 14 over 5 years. In each of these years a small budget surplus was generated and inflation fell to almost zero. Total expenditure on employment costs was maintained at about 60 per cent of revenue.
In 2013 the country went through another election in which the MDC was overwhelmed by a combination of military force and intimidation, manipulation of the voters roll and the voting process. Zanu PF assumed a two thirds majority in Parliament and Mr. Mugabe was given another 5 year term. This resulted in an immediate increase in State expenditure to $4,8 billion a year and employment costs to nearly 80 per cent of total revenue.
At the same time business confidence declined and the stock market fell by one third, a billion dollars left the banks followed by the failure of 9 commercial banks and the loss of a billion dollars in depositor’s funds. In the following years, revenues to the State declined and this has continued into 2016. The following table shows what has happened:
The impact of the fiscal changes in 2013 can be seen from the above table – the first year was the budget under the GNU team and then the final outturn after the changes to staff costs. The subsequent changes show an accumulative 37 per cent decline in revenues and GDP and the fiscal deficit rising from 10 per cent in 2013 to 30 per cent in 2016.
The cumulative deficit of $2,5 billion between 2013 and 2015 was funded mainly by treasury bills which pushed domestic debt to nearly $6 billion. This is on top of $11 billion in foreign debt under discussion with the IMF. This continues to grow rapidly.
What people need to understand is that when the State issues a Treasury Bill, it is exchanging real cash with a paper IOU with no intrinsic value. This exercise therefore withdrew from the local market $2,5 billion in cash assets and replaced this with TB’s or paper “money”. Essentially the State was printing money.
In 2016 the inability of the State to find buyers for TB’s and the growth in the fiscal deficit meant that the government had to find a new source of funds. It turned to the Nostrum accounts at the Reserve Bank. These are funds controlled and managed by the bank but not owned by the bank.
The largest of these is the RTGS account. This contains funds in transit to and from local banks for the purpose of the transfer of funds electronically. In 2015 this account handled $45 billion or $170 million a day and the average delay on transfers was three days. Therefore, at any one point in time this account held $500 million in cash – real money in transit to and from private bank accounts.
In the first six months of 2016 the State has drawn an undisclosed amount from this account. Given the size of the fiscal deficit this must have involved at least $800 million. These withdrawals are illegal and in violation of IMF rules and have crippled the transfer system. Today, external payments are being held up for months and are being prioritized against a list of 4 categories of imports. Shortages are emerging and many firms are under severe and growing pressures.
When it became apparent that they could no longer continue to draw funds from this system, the State began to expropriate foreign earnings from exports. This now involves 100 per cent of gold and diamond exports and 80 per cent of tobacco earnings and 50 per cent of all other mineral exports – over 70 per cent of export earnings or $2 billion a year. What they are doing is to retain the hard currency earnings in the Reserve Bank accounts and then send an electronic credit for the same sum to the exporter’s private bank accounts. This is in effect “virtual” money and is not convertible. In fact it is a “duplicate” credit and reflects a UD dollar deposit in theory only. The hard currency from these export earnings is now being used by the Reserve Bank to fund essential payments externally.
Overall this means that the liquid cash reserves of the banks are now virtually depleted and banks are no longer able to pay out their depositors in cash. So called “plastic money” is the main means of exchange but this does not meet the needs of the majority. This situation is being exacerbated by the payment of civil service salaries in virtual currency and trying to get the banks to convert these funds into hard currency through their ATM’s or from tellers.
In August it is unlikely that this is not going to be possible and cash shortages will reach critical levels. Already this week, the armed forces have been told that for the second month in a row, they cannot be paid on due date (14th) and that no pay date is in sight.
The “Bond Note” proposal was intended to fill this gap and despite assurances about convertibility, no such arrangements are in place, the line of credit from the Afroexim Bank has not been concluded and large quantities of these notes have been printed in Harare and are being held in storage. The State is obviously very nervous about issuing these notes for fear of the backlash – this is totally justified.
The day that these notes are issued and start to emerge from bank ATM’s and they are found to have little value on the street or in the market, that is the day the long awaited revolution will start. The regime in Harare has its back to the wall financially and I see no way out.
The Growing Political Crisis
Driven by the rigged election in 2013 followed by the collapse of confidence and banks, the decline in national GDP and in overall employment has given rise to increasing frustration and anger. Recent cash shortages and changes to the import system as well as import restrictions have further exacerbated the situation. Police corruption and the evidence of massive corruption in government have brought things to a head and recent weeks have seen widespread protests.
The failure to select and appoint a successor to the Presidency has not helped; this is now being complicated by the growing health problems of Mr. Mugabe and the competition in the ruling Party. The regime has falsified the financial position of the State and the IMF talks have collapsed leaving the regime in Harare totally reliant on the international community for emergency support.
The MDC has made its position clear; the only way forward is one in which Mr. Mugabe resigns and retires; a transitional authority is appointed and acts as caretaker of national affairs and prepares for an election, the outcome of which can be challenged by no one. Then the new government has to implement the wide ranging changes that are needed to restore fiscal discipline and fundamentals; lay the foundations for economic recovery and the observance of all human rights.
I am afraid the international community is going to have to brace itself, once again, to support this process financially in order to meet emergency needs and maintain our stability while we do the necessary surgery to the patient on the table. Hopefully this is the last time.Post published in: Business