29 November 2013

Zimbabwe: After Elections, Reality Sets in

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THERE is a depressing familiarity (déjà vu they call it in French) about what is happening in Zimbabwe following controversial July general elections won by President Robert Mugabe and his Zanu PF party.

While the country is still surfing the dramatic sea change on the political landscape after Mugabe's historic yet hotly disputed victory, reality is beginning to set in as elections did very little to expunge serious challenges facing a nation trying to recover from a grim economic meltdown and ravages of hyperinflation.

Despite problems then, it's clear policies before polls were helping economic recovery as real GDP growth accelerated to a peak of 9% in 2010. The humanitarian situation and provision of social services had improved, halting deterioration of human development indicators.

However, economic recovery, which had started from a low base, is now stalling. Structural impediments are weighing heavily on manufacturing and utilities, previous locomotives of growth and employment creation.

Without a doubt elections left a trail of seismic waves of destabilisation. Apart from the liquidity crisis, other familiar problems are back: power and water shortages, poor social services delivery, diseases and infrastructure collapse. School kids are fainting due to hunger while children die of malnutrition and malaises like diarrhoea, dysentery and typhoid. Corruption and crime are rampant.

If there is a morning-after metaphor in politics it is now being crystallised by what is happening. Before and after the elections, over US$1 billion was lost. This of course worsened a liquidity crunch already gripping the economy.

With companies now closing in an unsustainable way and retrenchments scaling 300 redundancies a week, while non-performing loans surge towards 15% and the balance of payments position fast deteriorates, the liquidity crisis can only get worse, so will government revenues.

Banks, whose total deposits amount to US$3,9 billion, took a risk in their lending, hence the over 90% loan-to-deposit ratios but companies are failing to repay.

This is reducing credit supply and worsening liquidity problems, which eventually could trigger banks failures, given the rising vulnerabilities in the sector.

Zimbabwe's inability to engage in quantitative easing due to the current multicurrency system does not help matters. Even if the multicurrency regime has helped to ensure macro-economic stability following exchange rate stabilisation, it has brought its own complexities and challenges difficult to manage.

Unless there is major intervention via a huge financial rescue package, the situation can only get worse. Even then money alone won't resolve all of Zimbabwe's economic problems. There are still serious structural issues and outdated business and economic models. Reforms are needed to turnaround the situation.

Economists say over and above reforms and a policy shift, government has to create fiscal space for social and infrastructure projects, while insulating the economy against further shocks. It has to halt the haemorrhaging, stop revenue decline, return to cash budgeting and implement strong expenditure measures, including elimination of ghost workers, to close the financing gap.

The wage bill, which is almost 70% of the monthly revenues, must go down and outlays to bleeding state-owned enterprises must be cut. The central bank must be recapitalised and prudential regulations strengthened to contain liquidity, solvency, and credit risks. This must be done simultaneously with creating a business climate to attract local and foreign investment, and boost competitiveness.

Indigenisation policies must be aligned to a new economic plan, whether ZimAsset or wherever. To attract investment, property rights, the rule of law, security of land tenure, good governance, and labour market flexibility must be sorted out.

Otherwise, Zimbabwe will continue sliding backwards in the ominous post-election environment increasingly reminiscent of the dreadful meltdown era of 2007/8.

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