Zimbabwe’s inflation continues to grow exponentially year-on-year, as does distrust over the government’s handling of the economy with its new currency. LSE Alum Nathan Hayes examines the deepening crisis, and the political implications for President Mnangagwa.
Inflation in Zimbabwe has hit 176% year-on-year, up from 98% year-on-year in May 2019. When measured on a month-on-month basis, inflation came in at 39.3% in June 2019. Such inflation of more than 50% month-on-month constitutes hyperinflation.
The official June 2019 figure could, in fact, be lower than the actual price hikes experienced in the market, as much of the economy operates informally and official data would fail to capture these price rises. Hyperinflation may have arrived already.
Zimbabwe introduced the Real Time Gross Settlement (RTGS) dollar or ‘Zimdollar’ in February 2019 as an interim currency, to be used alongside the official US dollar, which operates at a much weaker level on the parallel market. In an attempt to reduce the spread between the official and parallel market rate, and dampen demand for dollars within Zimbabwe, the country’s finance minister in June outlawed the use of foreign currencies, making the ‘Zimdollar’ the country’s sole legal tender. The official and parallel rates have moved a closer since this announcement, but both are still weakening. The parallel market rate is currently around ZIM$10.5/US$1, and the official rate is around ZIM$9/US$1.
Mounting price rises over the past year has been driven by this sustained currency weakness, particularly on the parallel market, and a liquidity crunch. The destruction from Cyclone Idai in March and the severe ongoing drought, combined with weak economic fundamentals, will cause the economy to contract sharply in 2019.
Inflation could rise even higher over the coming months, fuelled by several factors: price hikes for essential goods such as fuel and electricity (as the government cannot afford to keep prices so low), salary increases for civil servants (which the government has promised), the issuing of more government debt and the minting of new notes and coins. After banning the use of foreign currencies, the government will need to print its local currency, and this could lead to hyperinflation, as happened in 2008.
There is a pervasive lack of confidence among many Zimbabweans in the country’s economic policies and its national currency. This will push people and companies towards using foreign currencies as Zimbabwe dollars are not trusted, and people want to protect themselves against sustained depreciation and soaring inflation. Indeed, many businesses still look to be operating this way. In July 2019, mining companies and hotels were granted an exemption from the foreign currency ban to pay for energy, highlighting the difficulties of maintaining such a decision. This partial re-dollarisation will not help engender confidence in the economy or domestic currency.
This currency weakness creates serious problems for Zimbabwe, because the country relies on imports of goods and raw materials, paid for in foreign exchange. The country has very limited access to foreign currency, however, as exports are weak, investment is extremely limited and Zimbabwe is largely cut off from international capital markets. Nevertheless, the country will receive some money from China and Afreximbank (a regional trading bank, which has lent money to Zimbabwe in the past), but not a significant quantity. Foreign reserves are estimated at only a few weeks’ import cover. Domestic production is extremely weak due to a lack of investment, prohibitive government policies and extensive power cuts (currently around 18 hours a day). The agricultural sector has been decimated by decades of mismanagement and the current drought.
Under the IMF’s Staff-Monitored Programme (SMP), which was signed in May 2019, the government agreed to stop foreign borrowing and reliance on the central bank to print money to finance deficits. The government will be unable to keep either of these commitments, however: the Afreximbank loan was announced just after the SMP was signed, and the government will rely on the Reserve Bank of Zimbabwe (RBZ) for printing.
There are mounting risks of protests with sky-rocketing costs, real wages declining precipitously and a widespread shortage of many essential goods. The army’s response to protests over tax hikes in January 2019 was brutal and received international condemnation. We are likely to see a similar government response the next time.
There are rumours of growing discontent amongst senior military figures. An attempted coup at the beginning of 2019 was only perpetrated by junior officers, however, and failed to materialise. But the mounting economic crisis could make the situation harder for President Emmerson Mnanagagwa – if the military is struggling, too, they may lose faith in him. Retired general and now Vice-President Constantino Chiwenga is said to be ultimately in control of the country. Without military support, Mnangagwa cannot last.
This post first appeared on the LSE Department of International Development Blog.
Photo credit: ZeroOne, Flickr