Zimbabwe’s Post-Mugabe Crocodile Tears

Zimbabwe stocks as the only savings haven paused after a near 400 percent advance on the MSCI frontier index through October, as the ruling party turned against President Mugabe approaching four decades in office after he cleared the succession path solely for his spouse Grace. The longtime army chief and vice president for the past two years, nicknamed The Crocodile for his alleged patient ruthlessness including violence against the political and tribal opposition, was dismissed for suspected plotting, but military allies sprung to his defense and deployed tanks into the streets and around key government installations to assert control. The President was confined to quarters and stripped of party leadership and subject to impeachment vote, as local and foreign democracy campaigners urged fresh elections. The power struggle had been brewing for months and coincided with a grim Article IV IMF review in July highlighting the depth of continuing economic and financial system collapse and remoteness of official lender reengagement with continuing arrears despite a staff monitoring program. The report traces a sad history since independence when per capita income was higher than neighbors and manufacturing lead output, and points to 1990s farm confiscation and runaway spending triggering hyperinflation as low points. It cited informal private sector resilience as a rare bright spot and praised the decision to replace the domestic currency with the dollar and rand a decade ago despite the “imperfect regime” in view of the undercapitalized central bank and scarce liquidity.  Public sector wage giveaways and an overvalued exchange rate soon endangered the system, and reserves have run out with steep current account deficits and unpaid external debt. New “quasi-currency” instruments were introduced as a half-measure, but so-called bond notes, electronic transfers and Treasury bills are poor substitutes for hard cash in circulation. Additional exchange and deposit withdrawal controls underscore the country’s isolation from mainstream trade and investment as well as diplomacy in light of sanctions over bad governance and human rights, the review commented.

To finance the 10 percent of GDP fiscal deficit above Treasury bill issuance capacity the government borrowed directly from the central bank, as the external position likewise weakened on falling agricultural exports and rand-based remittances. Overdue payment was cleared to the Fund’s concessional poverty facility under the 2015 “Lima process” but other bilateral and multilateral obligations remain outstanding despite attempts to line up commercial sources and to collateralize gold assets for refinancing. One fifth of currency in circulation is now bond notes trading at a sizable discount to dollars, and bank account daily limits are $20 with interest rate ceilings also in place. Foreign exchange priority is essential goods with an Article VIII restriction assigned under the Fund’s rules promoting open capital follows. Both growth and inflation were originally forecast at 2-3 percent this year, and before the official infighting over the post-Mugabe path fiscal consolidation was “urgent” especially with state enterprise losses likely to drain the central asset management company. Financial sector functioning was impaired with heavy bad loans and the severing of 50 correspondent relationships the past two years with increased credit and reputation risks. The business environment may improve from a meager base with recent Special Economic Zones, but the “indigenization” legacy may continue to prey on stock market wading safety, the analysis suggests.