This article first appeared in Moneyweb.
South Africans tuning into the Zondo Commission of Inquiry into State Capture may be horrified at the depth and extent of corruption alleged to have infested our government – but Zimbabwe is at a whole different level.
To take just one example: those with access to foreign currency allowances approved by the Reserve Bank of Zimbabwe, mostly those with top level Zanu-PF connections, were able purchase fuel at US$0.45 a litre in Zimbabwe and sell it in South Africa at US$1.20/l and in Zambia at US$1.10/l.
It doesn’t take long to become a dollar millionaire with that kind of arbitrage opportunity. It is the same story with maize meal, bread, flour, cooking oil and other basics. Connected Zimbabweans are making millions while ordinary people – or at least those with fixed salaried jobs – are paying 50-100% more for basic goods. They can barely feed their families.
This explains the recent rioting and violence in the country, says Bulawayo-based economist Eddie Cross. The country is a cesspool of infighting and intrigue, with President Emmerson Mnangagwa fighting rearguard action against his enemies who see an opportunity to unseat him.
“One of the problems we have here is open conflict between the ministry of finance and the Reserve Bank of Zimbabwe,” says Cross. “The Reserve Bank recently announced it is taking 50% of export proceeds from companies like Zimplats and offering them artificial exchange rates which are less than a third of their real value.
Export industries’ hands tied
“As a result, all export industries are effectively going bust. The biggest ferrochrome producer in the country, owned by Chinese investors, says it will have to suspend operations because a large part of its revenues are effectively confiscated by the Reserve Bank.”
Gold sales are down nearly 50% as a result of the Reserve Bank’s confiscation, so gold is now being marketed informally on the black market.
These dollars confiscated by the Reserve Bank are then allocated to the politically connected, who use them to arbitrage fuel, food and other commodities. Most Zimbabweans are forced to use so-called ‘real-time gross settlement’ (RTGS) dollars, which are worth less than a third of the value of US dollars.
Zimbabwe’s finance minister Mthuli Ncube is taking heat for the current economic crisis as inflation soars to 50%, raising fears of a return to the country’s hyper-inflationary past when consumer goods prices were doubling every few hours. That was a decade ago. The crisis was brought under control by introducing US dollars and South African rands as the accepted payment method. Almost instantly, inflation reduced to less than 3% a year.
Ncube’s economic reforms seemed sound enough. Public sector wages swallowed more than 90% of revenues, and the fiscal deficit was running at 40% of the budget. Something had to be done to fix this. In August last year he announced a roadmap of reforms, including lowering government expenditure and additional sources of revenues.
One of the new sources of revenue was a 2% tax of all money transfers. This is expected to generate US$2 billion on the roughly US$120 billion from electronic money transfers each year. Announcing these reforms in August 2018, Ncube also allocated hard currency accounts to all Zimbabweans, allowing them to receive payments in dollars, rands or other hard currencies.