Jan 25, 2019 | 10:00 GMT

8 mins read

There's Little Zimbabwe Can Do To Reverse Its Economic Rot

A Zimbabwean soldier watches shoppers lining up in Bulawayo on Jan. 17, 2019.
  • A shortage of foreign currency has put Zimbabwe in a dire economic situation with little means for short-term recovery.
  • The government of President Emmerson Mnangagwa will face increasing pressure from popular protests, which could prompt a hard crackdown.
  • Mnangagwa is in a race against time, as a further depletion of currency reserves could threaten his ability to sustain wage payments to the security forces.
  • Long-term relief for Zimbabwe will require significant investments that the country cannot undertake at present due to the lack of significant currency reserves or access to lines of credit.

President Emmerson Mnangagwa has been in Zimbabwe's hot seat for only a little over a year, but his government is feeling considerable heat. The legacy of a persistently weak economy under Mnangagwa's predecessor, Robert Mugabe, has left the country with few currency reserves. And last week, conditions became so dire that strikers and protesters took to the streets in Zimbabwe's two biggest cities to demand change. The protests have subsided for now, but the country's underlying economic woes have not — and that spells trouble for the future of Mnangagwa's government.

The Big Picture

Systemic economic problems have beset Zimbabwe for years, but the departure of longtime President Robert Mugabe and the arrival of Emmerson Mnangagwa had offered some hope. Anticipated economic liberalization and a reorientation toward the West, however, have yet to materialize; instead, economic problems have only deepened. Now, with few options available to ensure a recovery, the fate of Mnangagwa's rule itself has come into question. Continued economic failure could force the country to accept foreign food aid or a bailout, while the problems could even spill over into South Africa as a result of increased emigration.

The Quest for a Currency

If there is one thing Zimbabwe is known for, it is its flawed economy. Before its 1980 independence, the country was one of Southern Africa's major agricultural producers, but for years now it has been beset by perpetual food crises and economic collapse. One enduring image of the country's economic plight is the sight of trillion-dollar Zimbabwean notes; in fact, the banknotes hail from a previous crisis that led Harare to abandon its own currency, the Zimbabwean dollar, in 2009. That fateful choice, however, sowed the seeds of the problems that Zimbabwe continues to face today.

After the country abandoned the Zimbabwe dollar, its economy became entirely reliant on the use of foreign currencies for day-to-day transactions. The U.S. dollar is now the main currency in use, but other currencies, such as the South African rand and the British pound, also circulate. The adoption of foreign currencies cured the problem of hyperinflation, but it did not eliminate the underlying weakness of the Zimbabwean economy. In fact, it even introduced an entirely new challenge: guaranteeing access to a steady supply of those foreign currencies.

A chart showing Zimbabwe's declining currency reserves.

For Zimbabwe, this has proved difficult, in part due to its long-term trade deficit, under which a greater amount of currency exits the country to pay for imports than enters for exports. Foreign currency reserves, which Harare has occasionally boosted with loans, have steadily diminished since their highest point in 2009 (immediately after the abandonment of the Zimbabwe dollar) to less than $200 million today. The paucity of reserves has caused a cash crunch on the streets, where this is no longer enough cash to go around.

The country managed to avert an earlier emergency in 2015 when it released bond notes. The notes resemble a separate currency — and are sometimes described as a surrogate currency — although they are directly pegged to the U.S. dollar. Zimbabwe paid its civil servants with these notes, thereby reducing the strain on the government budget, as well as Harare's low foreign currency reserves. This creative monetary policy, however, merely bought Zimbabwe a few extra years, as the value of these bond notes has now collapsed in tandem with the depletion of the U.S. dollars that undergirded their use. In time, the black market exchange rate for the bond notes soared, ultimately leaving Zimbabweans with physical bond notes that were worth next to nothing, or electronic money they couldn't withdraw due to a shortage of hard currency.

The foreign currency crunch worsened in the final months of 2018, disrupting the flow of imports, which subsequently precipitated widespread shortages of fuel and certain food products. Things came to a head earlier in January, when the government more than doubled the price of fuel. The overnight decision compounded Zimbabwe's problems, as the higher prices significantly raised the cost of transport, which, in turn, hiked prices for all other goods. With many Zimbabweans already feeling the financial pinch on basic necessities, the additional shrinking of their purchasing power immediately ignited protests.

A graph showing Zimbabwe's imports and exports.

Hands Tied

But as people flood into the streets to demand economic relief, there is little Mnangagwa can do. The government's hands are tied by the economic reality, and while the administration may be able to introduce minor measures to postpone total collapse or maintain control over the country, there is no ready solution for the underlying factors that ail Zimbabwe's economy. Nevertheless, the clock is ticking for the government, as shortages of fuel and cash are disrupting public services such as garbage collection — another issue that could inspire even more protests. What's more, if Harare completely loses the ability to pay wages, it would eventually affect the security forces on whom the government's rule depends.

In the past, Zimbabwe has relied on loans to guarantee its government budget, but constant deficits have depleted reserves, while the inability to repay outstanding debt means it can no longer obtain new loans. Even China, which backed Mugabe and is now supporting Mnangagwa, refused to offer a $2 billion bailout at the end of 2018. Turning elsewhere, the Mnangagwa government reportedly requested a $1.2 billion loan from South Africa, but the latter declined. Instead, Pretoria is said to be considering a significantly smaller loan of around $7 million — well short of what Zimbabwe needs to address its acute problems. South Africa has also offered to negotiate on Zimbabwe's behalf in an effort to convince creditors to forgive outstanding debt so that Harare can open new lines of credit, but such an approach may not pay dividends soon enough; alternatively, even if it does, the funds might only provide a temporary palliative.

Harare's Uphill Battle

Ultimately, long-term relief will require a significant overhaul of Zimbabwe's economy. The country's persistent trade deficit — in spite of its abundant natural resources — represents one major challenge. Mnangagwa has already tried to attract renewed investor interest in Zimbabwe's minerals and diamonds, but the country won't be in a position to generate revenue from those assets for several years at least. At the same time, reducing reliance on imports such as fuel, food and electricity would require a much longer timeframe due to the need for significant infrastructure upgrades — assuming the government could even secure financing for such projects.

According to some reports, Harare is supplementing its gold reserves, but such news raises its own questions: If Zimbabwe has been sitting on gold reserves this whole time, why hasn't it used them to alleviate its woes?

The government has launched plans for a new currency, but accounts of when Harare might introduce it vary widely (some claim the currency might be here as early as next month, while others have suggested 2020). Mnangagwa has been discussing a new currency since the early days of his tenure, but serious questions remain as to its feasibility. Any new currency would require backing by other assets, but without sufficient foreign currency reserves or access to significant loans, the prospects of success for Zimbabwe's likely gambit appear dim. And according to other reports, Harare is supplementing its gold reserves, but such news raises its own questions: If Zimbabwe has been sitting on gold reserves this whole time, why hasn't it used them to alleviate its woes?

Zimbabwe clearly has options for longer-term recovery, perhaps through economic restructuring and a series of large loans to float the country and finance its economic restructuring. Whether Mnangagwa and the remnants of his Zimbabwe African National Union-Patriotic Front-led government will remain in power to see that day, however, is an entirely different issue. As the crisis worsens in the short term, opposition to his presidency will rise. After all, protesters have demanded a new government, early elections and constitutional reform. 

Frustration will continue to well up within the population, with the calls for change likely to build until relief finally arrives. At the end of the day, however, Mnangagwa rules thanks to his control over Zimbabwe's security forces, and their loyalty will go a long way toward blunting the protests. Nevertheless, even the security forces might eventually come to feel the effects of the widespread shortages if the government can no longer pay their wages. In all likelihood, Mnangagwa and his party have access to a number of private and unofficial financial resources they can use to kick the economic can a bit farther down the road. Right now, the future of the country's brittle government depends on it.

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