The Root Causes of the Fiscal and Monetary Crisis in Zimbabwe
Since Zanu PF resumed full control of Government in 2013, Zimbabwe has been sliding slowly, but steadily downhill in both fiscal and monetary terms. I estimated the GDP in 2013 at $17 billion based on the total value of cash collected from our local tax base. Today my estimate is $14,6 billion based on the same measure and this is supported by the Ministry of Finance. That is a 15 per cent decline in our gross economic output in 3 years. In 2013 we had no sign of any shortages of cash in the system – imports were on open general license and all goods were in free supply. Today cash withdrawals are down to a tiny amount each day or week and stringent import controls are back and shortages are manifesting themselves all over the economy. Exports remain stagnant or below the level achieved in 2013 and FDI and Remittances are also down significantly.
What has gone wrong?
The first thing that happened immediately after the elections – virtually in the first two months, was a near total collapse of confidence. Put bluntly the markets voted against the new Government. The stock market fell 30 per cent as investors – largely from abroad, withdrew $1,5 billion from the stock exchange. Then depositors withdrew a billion dollars from the Commercial Banks and suddenly, after increasing by 14 times in 4 years, from $280 million in 2008 to $4,2 billion in 2013, tax revenues, across the board declined, falling from $4,3 billion to $3,4 billion in 4 years.
The near total collapse of market confidence has continued unabated and stocks are now only a third of what they were in 2013. There are no signs of any return of confidence and if people could get their funds out of the banks, virtually every bank in Zimbabwe would face liquidation today. As it is, a third of all banks have closed their doors since 2013 with a combined loss of many hundreds of millions of dollars. This has destroyed whatever is left of market confidence in the banking system.
In a desperate effort to halt the bleeding, the State has imposed harsh restrictions on cash withdrawals and imports. They have floated a new currency and it is rumored that they will shortly issue larger denomination notes. In this case the new currency will take over, virtually completely, as the local means of exchange for cash. At the same time, the budget deficit has ballooned from a small cash surplus in 2012 to a deficit in 2016 of $1,4 billion in a budget of $4,8 billion or nearly 30 per cent, a completely unsustainable figure in any country.