Zeronomics zeros heroes

One of the lesser known calamities of Gono’s recent policy crunch is the plight of the ordinary Zimbabwean. In country where so many have given up on the formal economy and turned to “illicit” activities for the survival of their families, there is still a suprising number of Zimbabweans tryng to live by the book. Sadly, it is these, the law abiding citizens of our not so great country that are being squeezed to death by the new policy.

Not only did Gono slash zeros in his “Sunrise for Zimbabwe” pronouncement, he also silently devalued the dollar against the greenback by some 40 per cent to 1US$:250zW$ (250,000 in old currency). While the press missed this, business owners across the country gingerly raised prices citing the devaluation of the dollar as heard in a commuter omnibus in Harare,

Dhora rakadonha futi. Munofunga kuti mafuta anofambisa mota anotengwa nei? (The [Zim] dollar fell again. How do you think we pay for [imported] oil?

Immediately after Gono announced the policy commuter omnibuses, the main mode of transportation within and between Zimbabwe’s towns increased fares by 100 per cent blazing the trail for hundreds of other businesses to follow.

Why did they do this? How could they get away with such murderous greed? Tarry and I’ll tell you.

When people realized that they risked losing a lot of money if they tried to keep hoarding the “old currency” a stampede began as they hedged against inflation and the new currency by investing in goods. Of course store owners are more than happy to see the capital they have seen disappear into the “black” market willingly return. Besides, they know as long as they keep copies of receipts of sales, they will have no problem converting the old currency to the new currency as per the terms of exchange Gono stiputlated.

So for the past week, retailers in the formal economy have become transaction bankers for the informal market and Zimbabweans who were hoarding cash. They accept the cash for goods that they sell and deposit that into banks in exchange for the new currency. Meanwhile the informal traders who are buying the goods are hoarding them just like they did with the money waiting for the hyperinflationary environment to make them “millionaires” in the new currency once it’s available and has become legal tender.

So in a sense the unjustified price increases can be viewed as a tax levied on Zimbabweans using the retail system to update their illegally held currency. Simply put, as demand for goods (not services) has increased due to the currency repartriation stampede, the price of said goods has increased. This a phenomenon you learned in basic economics.

So now we return to our by the books hardworking Zimbabwean.

Never having engaged in illicit trade, he’s now seen his purchasing power parity (PPP) eroded overnight. His far stretched income is now tattered beyond reprieve as he will not be able to keep things together. While everything else has increased, wages have not. This is a reality that set in early last week but the government is only catching on this week. They can’t even do anything to fend against it.

The reality is Gono’s zeronomics are making zeros of our nation’s true hereos.

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Eddie Cross: Living on the edge

The Sword of Damocles.

For those who are not familiar with the above saying, it is used to describe a situation where a heavy fighting sword is hung by a thread from the roof over the head of a person who was strapped down underneath it and awaiting death. The Zanu PF regime is in just such a position and during the Minister of Finance’s address to Parliament last week, he held a knife against that thread and threatened to cut it and in so doing, in my view, he would signal the death of Zanu PF and his own regime. The issue he was talking about was one that I have addressed several times before – the price of maize.

Maize is that stuff the Americans call corn and feed to their hogs and cows. In Africa – certainly southern Africa, it is the primary food staple and we eat huge quantities of it every day. It is cooked as porridge and eaten with some form of “relish”. Perhaps oil and vegetables, a bit of meat with some gravy or sour milk, sometimes even rough peanut butter. The great majority of Zimbabweans have not “eaten” if they have not had “sadza” at least once a day. Most poor families would have cold sadza for breakfast (left over from the evening meal) and then at least one large meal at lunch or in the evening with hot sadza as the main course.

We eat 115 kilograms of maize meal per capita per annum. It is therefore a very important component of daily life and the key to the tenuous stability of Zimbabwe lies in the fact that it is cheap and reasonably available. But there is a price to pay for this and no one – except poor old Herbert, dares to talk about it.

The facts are as follows: –

1. We need 1,2 million tonnes of maize a year for human consumption –
assuming no cross border activity.
2. We need another 600 000 tonnes for animal consumption as stock feed.
3. We need about 100 000 tonnes a year for industrial use – the production
of breakfast cereals and snacks, starch and alcohol.
4. We produced last year, about 700 000 tonnes of maize in Zimbabwe, we
imported over 1 million tonnes and maize was constantly in short supply.
5. This past season the government claims a crop of 1,7 million tonnes but
most observers think the actual crop is less than 900 000 tonnes and the expectation is that we will again have to import over a million tonnes.
6. The Grain Marketing Board has a total monopoly over maize grain imports,
purchases and sales. The Police and the military enforce this.

The economics of this trade are astonishing – even in a country and a continent where politically inspired skewed economic policies are rife. The South African grain industry grew a crop last year of over 10 million tonnes and with domestic consumption at about 7 million tonnes, had a significant surplus for export. This gave rise to price levels in South Africa at import parities and generally below R1000 per tonne. At one stage the price was as low as R700 per tonne and this threatened the viability of the whole industry.

This past year, South African farmers have cut back on their maize plantings and will produce less than 6 million tonnes – output will be below consumption for the first time in many years. As a result prices have risen sharply and are now running at about R1500 per tonne. South Africa is now importing grain from abroad (mainly yellow maize for stock feed) and is continuing to export white maize to the region.

This price translates to a landed cost of maize imported to Zimbabwe of R1750 per tonne. Transport charges from silos in South Africa to the closest silos in Zimbabwe have to be paid in foreign currency. This suggests a local landed cost of Z$60 million at bank rates and Z$140 million at parallel market rates. Local producer prices are currently set at Z$31 million per tonne.

These price profiles must be set against the selling price that has prevailed now for a considerable period of time of Z$600 000 per tonne or R17,50 per tonne – 0,1 per cent of the actual cost of imports and 0,2 percent of the local producer price.

This enormous price differential (administrative costs at the GMB are 10 times the selling price) leads to massive market distortions – cross border trade is huge as the cost of maize meal in Botswana and South Africa is equal to about Z$280 000 per kilogram compared to Z$18 000 to Z$28 000 per kilogram in Zimbabwe, depending on source and quality. Technically there are no reasons why a local farmer should not sell to the GMB. On paper the retail price of maize meal is so low that the GMB price should be very attractive. In practice this is not happening – deliveries to the GMB have been less than 100 000 tonnes total so far this year. With stock feed compounders paying the full price for imported maize and sourcing all their foreign exchange to do so in the parallel market, they offer high prices to producers even though this is illegal. Roadblocks are routinely manned by GMB staff to prevent this trade, but it happens – the differentials are just too great.

But the main impact lies with the GMB which, even though the World Food Programme is importing food to feed up to a third of our population, must itself import about 50 000 tonnes of maize a month to meet domestic needs for human consumption. The numbers are frightening: –

1. At official foreign exchange rates of 250 to 1 for new dollars to the US
dollar, the cost of imported maize to the GMB is Z$62 500 new dollars per tonne. Add to this handling charges of Z$10 000 per tonne and the cost out of a GMB silo is Z$72 500 per tonne.
2. The GMB recovers only Z$600 per tonne from sales leaving a deficit of
Z$71 900 per tonne or Z$3,6 billion new dollars a month. (US$14,4 million).
3. The cost of these direct imports will be US$150 million a year resulting
in combined losses of Z$43,2 billion new dollars.

With total foreign exchange availability to the Zimbabwe government via the Reserve Bank at about US$560 million per annum – all at about Z$250 to 1, it is most unlikely that the hard currency for these essential imports by the GMB will be available – competing demands for fuel and electricity and other essential imports will consume most available resources. I still think it likely that someone or another government is in fact funding the supply of maize to the GMB at present. Traders tell me they have no idea where the money is coming from. One local maize importer says he knows but will not tell me who it is. Whoever it is should take note that a new government here will never repay such loans – designed, as they are, to simply extend the life of a bankrupt and repulsive regime.

For the rest, it’s back to that statement by old Herbert and his threat to “review” the selling price of maize to millers. When he said that I bet every Zanu PF leader in the country shivered. Can you imagine what would happen if a 10 kilogram bag of this basic essential suddenly rose in price by 10 times. There would be a revolution. Herbert knows that time is running out – such distortions in prices simply cannot be sustained indefinitely and there are limits to the pockets of foreign donors. But for Zanu PF, the sword of Damocles hangs by a slim thread, rubbed day-by-day, hour-by-hour, by the winds of inflation.

E G Cross
Bulawayo, 5th August 2006

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Chaos, Censure meet Gono’s “Zeronomics”

Zimbabwe central bank governor, Gideon Gono’s bi-annual monetary policy review statement is the impetus of rampant confusion and contempt barely 24 hours after he presented the review. In a feeble attempt to infuse new energy into a productive sector in extremis, Gono slashed interbank interest rates and holdings requirement rates by around 300 per cent. However, by far the most controversial aspect of the statement has to do with phase one of Gono’s two phase currency reintroduction; removing three zeros from Zimbabwean dollar denominations.

A one way commuter omnibus trip that cost zW$150,000 yesterday, today costs ZW$150. Bread, which was officially pegged at ZW$200,000, now is a mere $200. Likewise, a bottle of beer now sells for a cool 300 as opposed to the “old” 300,000. Zimbabweans have been given 21 days to convert their money to the new ‘money bases.’

But this conversion is not going to be hassle free. People will have to explain the sources of their money when they make deposits of the “old” currency in order to recalibrate. From the governor’s mouth,

Deposits that exceed $100 million for individuals and $5 billion for corporates will require proof of source of funds and a Zimra clearance certification for tax payment for a transaction underpinning the cash.

Where holders cannot prove legitimate sources of funds, the cash will be deposited into Anti-Money Laundering Zero Coupon Bonds (AMOLAZEBO), with a minimum tenor of two years.

The owner of the cash will hold the bonds pending investigations and clearance with Zimra, after which they will then be redeemed at face value.

However, those who prove their funds to be legitimate after they are locked up in the bonds, will receive interest at the prevailing Treasury Bill rates.

Therein lies the unheralded intent of the sudden changes. The goal of the new monetary policy is not to stimulate the languid economy: no, Gono wants to eradicate the formal economy’s perceived worst enemy, the informal economy. It is evident from the policy pronouncement that Gono and a his coterie of assistants along Samora Machel Avenue have been planning how best they can ambush the informal market for months.

For years now, Gono has watched as money has literally “disappeared” from the formal market as people found better ways of using it on the informal market. Estimates suspect there is up to $35 trillion stashed in what Gono lampooned as “mini Reserve Banks” in the informal market. After months of wrecking his brain, he decided the only panacea to the formal market’s anemea was to change the currency, and hopefully call the end on the informals.

Gono thinks changing currency denominations will force the informal market to fork over the money it has. In essence, recalibrating the currency is a blitzkreig on the informal market.

If it works, it will only be a matter of time before the informals siphon out the “new” currency as they seek to escape the burden of overregulation of the formal market. Even worse for the governor is the possibility that the informals could completely dismiss the “new” currency and keep operating using “old” money standards.

If that scenario plays out, we could now have two currencies; the new currency on the formal market, and the old on the informal market. That is one beast I am sure Gono did not intend to create.

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That is the economy, stupid!

While reading the Saturday’s edition of the Herald I was reminded of how badly the Zimbabwean government has misunderstood the capitalist system and how it is playing itself out our country. Generally put, the Zimbabwean government, is guilty of distrusting the market system. In their bid to correct all that is wrong with the economy, they’ve overregulated the formal market, so much that it has become inaccessible for most Zimbabweans and Zimbabwean businesses.

But there’s a minority in Zimbabwe who, in the face of the failure of the formal economy, have become part of a vibrant alternative market. In the informal market people operate laissez faire; free from the entrapments of government precipitated laws and unweilding influence. Here they have been able to unleash the power of their creative thinking and be rewarded fairly well for it. Just like it is supposed to work.

The Herald’s erstwhile business editor, Victoria Ruzvidzo, is astonished to find just how well the informal economy is doing when she immerses herself into one of it’s most prosperous markets; the Dubai cross border trade.

At least 170 shoppers travel to Dubai every week, spending an average of US$3 000 each.

Some spend tens of thousands of the greenback and have to bring their wares in containers by sea.

On each visit, one person folks out US$115 for a single entry visa and $258 million for a return ticket.

This effectively means that on average, the shoppers, or cross-border traders as they have come to be known, spend a combined US$510 000 per week or about US$2,4 million per month on their trips, enough to buy a day’s petrol supply for the whole country.

Add this to the figures spent by those who ply the China, Singapore, and other traditional routes such as South Africa, Botswana and Zambia and you have a huge figure of foreign currency that could otherwise be allocated to more deserving national needs.

Sadly, like the officials over at the Reserve Bank and in the Ministry of Finance, Ruzvidzo is resentful of the informal market because the government cannot regulate and influence it. More importanly, they cannot levy and collect taxes on most informal market activity. So they yell and scream, deride and chase, but fail to realize that they cannot eradicate the informal market.

No one can do that.

Like the Zimbabwean government, many people don’t understand that the miracle of the capitalist free market resides not in the places where the business transactions occur (eg. Wall Street, Nikkei), or in the currencies of trade (US$, Yen). No, the magic of the free market is in the mind where an unparelled creative capacity ensures the most efficient matching of needs and resources.

Look around you, is there a “black” market? It’s doing just that; making sure that people with needs are brought into contact with resources that address their needs.

In many cases, say the U.S. (where, for the most part, the formal market is doing a phenomenal job of allocating resources to the needs of people) for example the informal market becomes “black” because it isthe place where trade in illicit goods is happening.

This is not the case everywhere; certainly not in developing countries like Zimbabwe.

Those readers who’ve read me for a while know that I have long been intrigued in discovering the reason why the market economy has succeeded so well in some parts of the world, while it let the rest of the of us down. My quest has led me among other things, to Hernando De Soto and this erudite assertion of his; the free market hasn’t failed in the developing world, it just hasn’t been discovered yet. De Soto claims contrary to popular opinion, the free market is alive in the developing world; it is just not recognized as the “formal market.”

In Zimbabwe, the government and their propaganda like the Herald demonize the informal market and label it the “black market.” They terrorize it with their police conducting impromptu raids all the time. The reality is that it isn’t a “black” market at all. It sources and allocates resources like oil and foreign currency at sustainable prices, not the superficial values imposed by the government out of political expediency.

The reality is, as De Soto puts it in The Other Path

People are capable of violating a system which does not accept them, not so that they can live in anarchy but so that they build a different system which respects the minimun of [their] essential rights. p.55

In other words, the informal market which Ruzvidzo and the finance people in government loathe is doing a better job of doing what the formal market should be doing doing.

In fact they should realize that: That is the economy, stupid!

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Hot Seat: Moyo, Raftopoulos and Robertson

Violet: We continue the teleconference interview discussing various issues of national interest with three people who have at one time or another advised some of the key players in Zimbabwean politics – political analyst Professor Brian Raftopoulos, former Information Minister, now independent MP Professor Jonathan Moyo and leading economist John Robertson. This week we are going to be discussing how Mugabe thinks. What is his mindset? Why is he allowing the country to collapse so totally? A huge part of that collapse has been economic and so we start this week’s discussion with the economy.

With inflation nearing 1200% it’s been said the economy has become Mugabe’s real opposition. So I first asked economist John Robertson to explain the state of the economy and tell us how bad things really are.

Robertson: The state of the economy is certainly extremely serious. We have lost about half of our gross domestic product. The GDP per capita has come down to less that US$1 per day for the population as a whole and at that level we have, I am afraid, a very debilitated population. I think many, many people are suffering malnutrition and because of the treatment and the various little security measures taken by the government we have also a traumatised population. Which might explain why they have not taken mass action to date. There was some evidence of courage to do that back in 1997/ 98, but the treatment that was meted out to the people after that has left them very, very cautious and very anxious not to have that experience again.
Now these problems are mounting in such a way that the economy can no longer employ most of the people. We’ve got some 300 000 youngsters turning 18 in this country every year – about maybe 10% of them can find work – the rest of them are unemployed and unable to find any kind of suitable employment anywhere. So they have to leave the country if they want work. We’ve got many of them leaving for South Africa illegally and facing very serious problems when they do that. I think that we face a very, very long recovery unless we get a massive amount of assistance from abroad. And once again I say that South Africa’s position here is the most important. We could speak of following the same path of recovery as say Uganda or Ethiopia or Mozambique and each of those cases we are talking more than 30 years and they still haven’t come right. We could come right very much more quickly with a lot of assistance from South Africa. I believe that the South African assistance could be in the form of the assistance given say to East Germany by West Germany when the Berlin Wall came down.

Hot Seat: Analysts say engagement not mass action

Transcript of ‘Hot Seat’ programme in which SW Radio Africa’s Violet Gonda talks with Professors Brian Raftopoulos, Jonathan Moyo and Economist John Robertson.

Broadcast on 13th June 2006

Violet: Zimbabwe is a country in crisis and many have asked what needs to be done internationally by all democratic forces and what role the regional and international community can play – now, and in the post Mugabe period. To help discuss various ideas I’ve invited three people who have at one time or another advised some of the key players in Zimbabwean politics. They are political analyst Professor Brian Raftopoulos who once acted as an advisor for Morgan Tsvangirai’s MDC, independent MP Jonathan Moyo, who was widely described as an advisor and strategist for Robert Mugabe and well known economist John Robertson. Welcome to the programme gentlemen. Now we will start with a common question, ah, well, there is no question, but there is a serious political crisis in Zimbabwe and that the economy has collapsed with inflation officially at 1 193.5 % but generally it’s understood to be much higher than that. Now obviously something must be done about Zimbabwe but what are the suggestions? Let’s start with Professor Moyo.

Jonathan Moyo: Well, the suggestions – I don’t think that the way our country is and how things are going invites suggestions, clearly what is needed is action. The first action, of course people would reasonably expect, that it must come from government – what government should do. And, the problem we have at the moment is that the government seems to be in a policy paralysis and it does not have a response. Although, I must say, the recent developments suggest that there is some international engagement which might lead to some resolution of this crisis because of the consequences of this economic meltdown. All this discussion around a possible initiative led by Kofi Annan suggests that the government now wants a way out and the question is, what it would be? There are a number of scenarios we can talk about in the course of the discussion.

Violet: Ok, we’ll talk about that later, but I would like to know the views of John Robertson and Professor Raftopoulos about what they think needs to be done. John Robertson?

John Robertson: I believe that the government today is completely out of its depth and doesn’t have the resources any longer to deal with these crises. Unfortunately it has constantly sought economic answers to what are basically political problems. I feel that strenuous efforts must now be made to devise political policies that are there to fix the political problems. We’ve seen a massive decline in the level of production, a total absence of new investment into the country, a massive flight of skills from Zimbabwe and the country now has no credit rating internationally. And, although we might have raised a bit of money to pay for fuel by pledging exports of certain minerals, we have come nowhere near solving any of these problems because the political hang-ups still keep the people who could help the country at arms length. So, I think that the answer has to lie in the political arena, not in the economic one.

Eddie Cross: “Breakdown or Breakthrough

I walked into a business here in Bulawayo this morning to discover that the staff was basically cleaning up prior to shutting down. The owners were already in South Africa – they had left without telling many friends that they were going. This is an event taking place across the country right now – business people are deciding that they have had enough. They cannot export at ruling exchange rates, local demand has simply disappeared and they have no raw materials and no cash to continue operating.

The Zimbabwe economy is closing down – literally. We have inflation now at nearly 1200 per cent per annum (28 per cent in May and 21 per cent in April so it is still accelerating). But unlike the situation in most other countries that have experienced hyperinflation, the Zimbabwe economy is imploding at the same time. GDP is now down about 50 per cent, exports by two thirds and if it is at all possible, output in all sectors – mining, agriculture, industry is down again this year over last.

The reasons for the implosion in the economy are largely self-inflicted. They rank from open threats against owners of businesses, expropriation and theft of assets by people associated with the ruling Party. The near collapse of the legal system and massive political interference with what is left. To this you can add total confusion in terms of macro economic, monetary and fiscal policy. Totally skewed exchange rates accompanied by wholesale theft of revenues and the misuse of scarce resources allocated on a patronage basis.

In recent weeks the reports of accelerated decline have poured in – gold output down by a third on last year, winter cropping down 50 per cent, electricity supplies down to 70 per cent of demand and threatening economic activity across the board. The tobacco crop down by a third and prospects that the coming crop could be very small – perhaps less than 20 000 tonnes. Industrial activity shrinking fast and, if it was at all possible, the numbers of foreign tourists still dropping.

Eddie Cross: Swirls in the Water.

A few years ago I spent a marvelous time on the Chobe River flood plains on the boundary between Namibia and Botswana. For those of you who do not know the area, the Zambezi River runs down the western border of Zambia for several hundred kilometers and then hits a basalt ridge where it backs up and spills over into the flood plains on either side of the river creating huge seasonal wetlands.

In the south, these wet lands drain into the Chobe River and then back into the Zambezi River at Kazungula. This gives the river its May flood that makes a visit to the Victoria Falls so spectacular. When this process is underway from April to July, the waters of the flood plains drain into deep gullies that are kept open by Hippos and these run for up to 30 to 40 kilometers into the Chobe River.

We spent a wonderful day on the flood plains with a local guide armed with light fishing gear. We went up to the head of a system of drainage channels and then drifted down with the current. As we did so our guide showed us how to cast our lures into spots on the edge of the channels where a swirl indicated the presence of Tiger fish. These were hunting the smaller fish emerging from the reed beds where they had lived for the past few months.

The results were spectacular – about every third cast saw a fish rise and strike and of these we landed about one in three. We fished all day in wonderful surroundings, lush swampland as far as you could see, beautiful clear blue skies and a temperature of about 25 c. Not much game but we had to watch for Hippo and Crocodiles.

Swirls In the water. That is what we have seen all week in southern Africa. Brief statements from South African leaders about the crisis in Zimbabwe, statements from the UN in Geneva and New York. Tantalizing stuff, but what does it all mean? It probably points to political Tiger fish hunting smaller prey in Zimbabwean waters.

“Live Within Your Means. Do not Support Corruption”

Pat is a registered nurse in his early 40’s working at a hospital in Zimbabwe’s northeastern Mount Darwin district. In Zimbabwe’s hyper-infaltionary economy supporting his family has become a distant dream. “It’s not too much to ask is it,” he pondered, as he began to explain how difficult things have been for him in recent months.

“This hasn’t been a good start to the year,” he tells me. In January of this year, Pat struggled to find a place for his daughter to enroll for “form 1” (8th grade). “I really wanted her to go to Bradley Institute (a Salvation Army Mission High School), but when I when to talk to them I didn’t have the money they wanted.” He adds, “I’m a qualified nurse, I should be able to afford a decent education for my kids.”

Dejected, he resorted to sending her to a school he could afford which also meant it isn’t as good. He found place for his daughter at Mavhuradonha high school, a boarding school run by the Evangelical Church. “Anna (his daughter) doesn’t like it there, but what can I do?” If she doesn’t like the school, how can a 13 year old be motivated to succeed?

Last week Pat’s outlook turned even bleaker. Apparently the school invited all parents to come for a “consultation day.” Pat is not sure he wants to attend the consultation day meetings. It’s not because he is disinterested in his daughter’s academic wellbeing that he doesn’t want to go. “I’ve been hearing rumors that they want to double school fees to 40 million and they plan to announce it at the consultation day.” His plan by staying away from the meetings is to avoid confirming what has become inevitable in Zimbabwe’s economy riddled by inflation at 1,000% inflation; ever increasing prices.

Delaying the Inevitable

Zimbabwe’s Central Statistical Office (CSO) has delayed the release of April inflation number without cause. Speculation is rife that this move is a shameless bid by Harare to keep the nations four digit inflation under the wraps.

Read more about this here and here.

Need more evidence that Mugabe & Co. are nervous about writing they see on the wall?

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