Monday, January 19, 2009

Observations on Current Economic Conditions, January 2009

Comment from john Robertson
Having reached the end of 2008 with most businesses having adopted the now approved use of foreign exchange to settle transactions, the dollarisation of Zimbabwe’s economy was well on its way before business opened in 2009. But having also seen the forced suspension of activity on the Zimbabwe Stock Exchange and the conversion of foreign exchange into Zimbabwe dollars become an increasingly pointless exercise, it was inevitable that the Zimbabwe dollar would cease to have any important function beyond the payment of accounts to government bodies.
The civil service itself has become a casualty of the collapsing Zimbabwe dollar as no civil servant wants to be paid in Zimbabwe dollars. Neither do the people in the uniformed forces, or the employees of official bodies and parastatals, such as the Reserve Bank, NRZ, Air Zimbabwe, Noczim, GMB or Zisco, to name a few,
Government knows that it is completely out of its depth in trying to meet demands for hard currency, preferably in cash, to pay the hundreds of US dollars a month wanted by the hundreds of thousands of people on its payroll. Zimbabwe’s ability to earn foreign exchange has slumped so severely in recent years that the retentions taken from exporters’ foreign earnings would come nowhere near the monthly salary bill. The amounts it could buy in the open market, using Zimbabwe dollars to pay for them, has also fallen away now that nobody wants the Zimbabwe dollars at any price.
Most desperately needed now is a means by which Zimbabwe could get from a trusting source a series of foreign currency loans, part of which would have to be in the form of injections of working capital to permit all Zimbabwean’s bank account balances, savings and pensions to be converted at an acceptable exchange rate into hard currency. This would allow the total and complete displacement of the Zimbabwe dollar and, if acceptable conditions were restored, permit normal production, trade and investment to resume.
In terms of the very far-reaching agreements that would be needed to get backing of this kind from anywhere, Zimbabwe would have to set about restoring productive capacity as fast as possible so that the huge loans could be paid back.
Once all that had been achieved, Zimbabwe could reintroduce a stable and respected currency of its own, but that would be many years ahead. For now, the important challenges are to accept that Zimbabwe has destroyed its present currency and has made itself subject to any requirements that might be laid down by any country or organisation that is prepared to commit itself to bankrolling the economy and also shepherding the country through to a recovery.
Government has permitted the damage to become so profound that no question now remains on whether Zimbabwe can recover in reasonable time without assistance. Apart from suffering one of the most persistent cholera epidemics ever recorded, Zimbabwe is facing an almost total crop failure in 2009, most households will soon be in no position to obtain the foreign currency needed to pay for even basic imported food, and the government’s complete inability to provide for any portion of the population’s needs problem with any of the and is in no position to argue against any of the terms and conditions that might be written into any documents offering assistance.
When West Germany first started to assist East Germany, it launched its efforts by permitting East German marks to be converted at a generous rate into deutschmarks. Of course, a full merger of the two countries into one was also happening, but most European Union countries were also being further unified through the adoption of the euro.
Zimbabwe need not consider unification with South Africa, but the process could become part of the intended plan to bring all the regional countries into a SADC or Comesa grouping that could one day form a single customs union and a single currency union.
If South Africa were to become the leading player in Zimbabwe’s recovery, one of its first requirements would be that Zimbabwe accepts the need for the disciplines and authority of a still-to-be-formed supra-central bank that would ensure that no member country’s conduct would undermine the common currency or any of the regional grouping’s other share objectives.
For Zimbabwe to qualify for such help, the country would have to go further than merely set about restoring production. The authorities would have to submit to the much greater level of discipline and expertise of the assisting country or organisation. This whole idea would need a considerable amount of determined and detailed work, but something along those lines might materialise if Zimbabwe is to be prevented from becoming another Somalia.
All the above considerations point to the strong probability that extrapolating exchange rates and inflation rates from 2008 into 2009 will be a futile exercise, but to show how far off the map we will go if we remain dedicated to current policies, I have attached a few tables that show the likely movements, even if monthly inflation rates can be kept lower by the as yet limited an regulated level of dollarisation.
I have also attached a forecast of GDP and various other economic indicators into 2010 in the hope that these suggestions will be helpful. They illustrate the frequently made point that recovery cannot happen quickly and further downturns are probable even if better policies are adopted soon. Time, money and expertise will all be needed, but these will be hard to assemble if successful efforts are not made quickly to restore confidence.
The measures to achieve that are all strongly political as they call for the restoration of civil rights, property rights, the freedoms of expression and association and the rights to free flows of information through independent newspapers and broadcasters. The also call for an independent judiciary and for uniformed forces that serve the nation, not a particular political party.
The challenges faced by Zimbabweans in 2009 seem already to be far bigger than those faced at the beginning of 2008, but now that the situation has become unworkable even for government, the prospects of an early breakthrough are very much more likely.
My best wishes for surviving the coming uncertainties!
Kindest regards,

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