Zim price madness: What hope? (Part 2)

via Zim price madness: What hope? (Part 2) by Michael Hobbes NewZimbabwe

This is the second and final part of an article by researcher Michael Hobbes on the problems of pricing in Zimbabwe since dollarization …

SO if the prices haven’t dropped, how are people in Zimbabwe, a country where the median income is about $6 per day, getting by?

I spend my last four days in Zimbabwe at Victoria Falls, the scenery-and-safaris tourist town right on the border with Zambia and Botswana. The city centre is an elbow of two streets lined with tour companies and souvenir shops. Men, women, and children line the sidewalk selling 100 billion Zimbabwe dollar bearer’s checks as souvenirs.

I am walking toward a shack with “RENT BIKES” written across the front. I’m close enough to see that it’s boarded up when I notice the tall, skinny guy in a goatee and a soccer jersey leaning against it.

“What are you looking for, my man?” he asks.

“Is this place closed?” I ask. “I was hoping to rent a bike for tomorrow.”

“Oh, this is my shop, I give bike tours,” he says. He introduces himself as Mark, tells me he’ll pick me up at my hotel tomorrow for a daylong tour.

Mark comes the next morning, right on time. He has a bike for me but none for himself. He says we needs to pick up another bike at his shop. As we walk into town, I ask him how is business, where do most of your customers come from?

He answers in generalities: Things are fine, they’re from everywhere. We are near his shack and a kid of about 18 is coming toward us, walking a bike. Mark introduces him as his brother. He gives Mark the bike and leaves without saying anything.

I tell Mark I want to see neighbourhoods, how people live here. For the last two weeks in Harare I’ve been in meetings, office buildings, and hotel conference rooms. I want to see what the country looks like up close.

Mark and I ride to a township about a mile from Victoria Falls’ main strip. Taxi drivers, tour guide operators, hotel chefs – this is where they live, Mark tells me. The township is on a slope, rows of iron shacks with dry canals running between them. Most of the houses, no matter how small, have vegetable patches out back. Mark tells me most people here can’t afford to buy food from the supermarkets, so they’re growing it themselves.

Two economies

“There are two economies in Zimbabwe,” says Musewe, the Zimbabwean economist I call after I return home. The first is the formal economy: bank transfers, credit cards, paychecks, tax returns. The second is the informal economy. “That’s where the middle class is, the unemployed, selling services with this dirty, old money,” Musewe says.

Zimbabwe’s infrastructure for public services was effectively put on pause during hyperinflation. Roads, sewers, communications, electricity networks, they’re all rusting. In July 2013, the city of Bulawayo asked all of its residents to flush their toilets at the same time to clean out the sewage system. The World Bank says Zimbabwe needs $33 billion over the next 20 years to repair its infrastructure.

Mugabe used to announce the poverty line and the minimum wage every year in a televised address, but stopped during the inflation years and hasn’t started again.

In 2012 the poverty line was $531 per month. The food poverty line, the bare minimum you need to survive, was $163. That same year the median wage was $253 per month. The lowest estimates say 70 percent of the population is unemployed. That doesn’t mean they don’t work every day, just that they’re in the second economy, the one without paystubs.

“Everyone has left the economy, even if they stayed in Zimbabwe,” Musewe says. “Ninety percent of people are using a pure cash economy.”

It wasn’t just Zimbabwe’s institutions that were put on ice during the inflation years. “There has not been any substantial human development since the mid-1980s in Zimbabwe,” says a World Bank report from earlier this year. Social spending is 8.3 percent of GDP. Before hyperinflation, it was up to 49 percent.

Mark shows me the primary school he went to, where his kids go now. The fees are $100 per semester. He takes me to a village outside the city. But by the end of the day it is clear that Mark has never done this before. It’s not his bike shop, he’s not a tour operator. He’s just a guy who saw a business opportunity – a tourist with an identifiable need – and found a way to fill it.

At the end of the day Mark charges me $40 for the bike rental and I give him another $40 as a tip, thinking about those school fees. The next day I run into the kid Mark introduced as his brother. He asks me how much extra money I gave Mark.

“Why?” I ask.

“He still owes me,” he says, “for renting him those bikes.”

It’s the politics

When I get home from Zimbabwe I call economists, financial institutions, businesses, I ask them how Zimbabwe can make its prices look more like Botswana’s and less like Boston’s.

Everyone I talk to says the same thing: They tell me all the ways to fix a liquidity crisis, then they tell me why none of them will happen in Zimbabwe.

The fundamental thing Zimbabwe needs is more money coming in than going out – a spigot of cash to fuel the businesses, the banks, the government, the population. The Ministry of Finance estimates that Zimbabwe needs $45 billion in investment just to get back to where it was in 1997.

One way to get this spigot going is to attract foreign investment. Zimbabwe still has an educated population, good roads, legacies of skilled manufacturing, and productive agriculture waiting to be revived.

The problem is the politics. In 2007, less than a decade after he confiscated the farms, Mugabe passed the Indigenization and Economic Empowerment Act, his way of telling the world he was coming after the factories, too.

The Act said that any company in Zimbabwe worth more than $500,000 had to sell 51 percent of itself to an “indigenous Zimbabwean,” or its managers would go to jail. Companies weren’t even given a choice of which Zimbabweans to sell to, they were just assigned controlling owners by the government.
Indigenisation muddle … Empowerment minister Francis Nhema

When the law was implemented in 2010, companies had 45 days to comply. Instead, many of them simply left. By 2012, foreign investment was down to just $400 million a year, a pittance compared to Zambia ($1 billion) and Mozambique ($5.6 billion).

“It’s the politics keeping investors away,” says Tapiwa Mhute, the Consultancy Africa Intelligence economist. She grew up in Zimbabwe on a commercial sugar plantation. It’s owned by a foreign company and might now have to be sold off under indigenization. “Investors are not too sure of what they’ll be allowed to keep, so they’re waiting to see how indigenization goes.”

Another thing Zimbabwe could do to ease the liquidity shortage is ramp up domestic production, sell stuff abroad, bring in foreign reserves like it used to do. There are even some signs this is starting to happen. Agriculture exports were $974 million in 2011, the first time export levels have surpassed where they were in 2000.

Borrow out of crisis?

Manufacturing is a bit more muddled. Zimbabwean factories, which contributed 21 percent to GDP in the 1990s, contributed just 0.6 percent in 2012. With imports expensive, borrowing nearly impossible, and international investors still skittish, most of the manufacturing firms are legacies of the pre-inflation days.

“You drive around and there’s factories everywhere, but they’re all closed,” Musewe says.

It’s easy to lay this at Mugabe’s feet. But the World Bank points out that the manufacturing sector started to shrink as far back as 20 years ago.

In a 2011 survey of companies, one where access to finance and political instability were identified as the biggest obstacles to doing business here, “cheap imports from abroad” came in third. In other words, Zimbabwe is suffering from a problem that, to Americans, may sound familiar: Why would you make anything here when it’s so much cheaper in China?

The great hope for Zimbabwean exports is the mining sector. In 2012, Zimbabwe’s minerals – mostly platinum, gold, and diamonds – accounted for 47 percent of its exports and 84 percent of its foreign investment. In 2011, Zimbabwe was the fourth largest producer of platinum and fifth largest producer of diamonds in the world.

But the profits from all these exports aren’t making it to the treasury. In 2012, Zimbabwe expected $600 million in revenues from the diamond sector alone, but somehow ended up with just $45 million. Mbada Diamonds, the only company to publicly report its revenues, says it gave Zimbabwe $117 million in taxes during that period. No one seems to know where it went.

“The diamond revenue is disappearing, it’s not going into economy,” Mhute says.

So could Zimbabwe borrow its way out of the liquidity crisis?

No dice there, either. Zimbabwe still owes $10 billion to the Paris Club, the World Bank, the African Development Bank, and all the other institutions that extended huge loans to Zimbabwe before hyperinflation destroyed its ability to repay.

In 2008, the IMF gave Zimbabwe a “hardship grant” of $500 million ($140 million of which Zimbabwe had to pay right back to the IMF to service its debt), but it’s still not eligible to borrow from any of the major international lenders.

Zimbabwe is paying $100 million a year in debt service, but it’s not enough. Every year the debt just gets bigger, driven by interest on those old loans and the accumulation of new ones. In June of last year, Zimbabwe defaulted on a $200 million loan from the Chinese government, and it’s mortgaged all the revenue from its two major airports as collateral for more Chinese loans.

One option Zimbabwe doesn’t have is bringing back its own currency. Earlier this year, Mugabe announced he wanted to bring back the Zimbabwe dollar, backed by gold: “We are mining a lot of gold in this country,” he told an election rally. “That gold should support our currency. […] When you have enough gold, you can sell that gold and make your payments for imports because currently an ounce of gold is worth over $1,000.”

Even by the standards of octogenarian dictators, this statement was pretty bonkers, and it set off a bank run and investor pull-out so severe the Reserve Bank of Zimbabwe had to issue a statement saying that a gold-backed currency wasn’t going to happen. Mugabe’s own finance minister posted on Facebook that the idea was “foolish to the point of insanity.”
Currency uncertainty … Many believe the government will bring back the Zimbabwe dollar

Robert Mugabe Show

But still, on July 31, Mugabe was re-elected, to a resounding groan from the rest of the world. Despite questions about the validity of the polls – how is it exactly that 110,000 of Mugabe’s votes came from people over the age of 100 in a country where the life expectancy is 56? – no one has seriously challenged the results, and Zimbabwe will remain The Robert Mugabe Show for the foreseeable future.

Mugabe is 89 years old, the world’s second oldest living head of state. No one knows what will happen when he dies or retires. Since the election, he hasn’t said anything publicly about reintroducing the Zimbabwe dollar. But that, everyone tells me, doesn’t mean it won’t happen.

“Just because they would have to be mad to do it, doesn’t mean they won’t,” Colin says. “People said they’d never take over every commercial farm because it would destroy the economy, and they did it. People said they wouldn’t take over companies and they did it.”

My last week in Zimbabwe I meet Helen, a public prosecutor from Florida. She’s on a safari tour all over Africa, and Zimbabwe is her last stop.

“They told us we’re only allowed to bring crisp dollar bills,” she tells me as we bump against each other in the back seat of a Jeep, looking for rhinos. “The tour company checked our money before we came, and rejected the bills if they looked old or worn.”

It’s easy to look at a troubled developing country from outside, to point out its challenges, its leaders, its systems, its idiosyncrasies. From inside, the view is more complicated.

In my day job, I meet MPs from Mugabe’s party who tell me they’re trying to prevent Chinese and Russian mining companies from displacing their constituents. I meet NGO advocates, working 12 hours a day, making $200 a month, lobbying from within the system that has destroyed their savings, emptied their communities. I meet mining company reps who tell me how hard it is to operate here, then ask me how to make it better.

Everyone says dollarization saved this place, that they would rather have expensive food on the shelves than no food at all.

Dave Mills’ TM supermarkets are importing less and less. Seventy percent of their dairy products come from Zimbabwean farms now. Next year they’re expanding, working with suppliers to increase production. The skills, the education, it’s all still here.

“If we can bring in the capital and the appropriate machinery,” Mills says, “then we can get cracking again.”

Zimbabwe faces impossible challenges, unbearable choices. It has been a hard country to live in for the last ten years, and it is likely to remain one for the next ten. Every hyperinflation leaves a legacy that lasts for generations. In Zimbabwe, that legacy is just beginning.

Lovemore, the gardener in Harare, stayed in South Africa until 2010, then moved back to Zimbabwe. “I looked around,” he says, “and people were starting to build houses again.”

I ask him if the prices make it a struggle to get by. “As long as you’re working, you have a decent life,” he says. “So I’m going to keep working.”