Posted Wednesday, 11 November 2009
In February 2009 Zimbabwe was the only country in the world without debt.
Nobody owed anyone anything. Following the abandonment of the Zimbabwe
Dollar as the local currency all local debt was wiped out and the country
started with a clean slate.
It is now a country without a functioning Central Bank and without a local
currency that can be produced at will at the behest of politicians. Since
February 2009 there has been no lender of last resort in Zimbabwe, causing
banks to be ultra cautious in their lending policies. The US Dollar is the
de facto currency in use although the Euro, GB Pound and South African
Rand are accepted in local transactions.
Price controls and foreign exchange regulations have been abandoned.
Zimbabwe literally joined the real world at the stroke of a pen. Money now
flows in and out of the country without restriction. Super market shelves,
bare in January, are now bursting with products.
recently visited Zimbabwe in the company of a leading Australian fund
manager. As a student of monetary history, I was interested to see what
had happened to a country that had suffered hyperinflation. How did the
people cope? How is the country progressing now? The current Zimbabwean
situation is complicated by the fact that President Robert Mugabe is
determined to stay in power whatever the cost.
The first part of this article deals with economics, the hyperinflation
and current situation, which is a picture of recovery and potential
vigorous growth. The second part deals with politics, both the historical
aspects as well as current developments, which are extremely fluid.
We were fortunate to have private interviews with the Prime Minister,
Morgan Tsvangirai, and a wide range of business leaders. This provided a
quick picture of Zimbabwe past and present.
There are common denominators in all hyperinflations. Generally
government finances reach a point where large budget deficits cannot be
financed by taxes or borrowings. The choices come down to austerity (with
the government cutting back its spending) or by funding the deficit by
creating local currency through the printing press, leading to the
inflation tax. This is always a political decision, but the line
of least resistance is the printing press. Cutting government
expenditures and laying off bureaucratic staff is anathema to most
In Zimbabwe, Robert Mugabe has made it his mission to remain President for
life. This has caused him to infiltrate his supporters into the army and
police force. He also used Government finances as a way of funding
patronage. His use of the printing press was liberal and nobody was
prepared to stand up against him. This eventually led to inflation
gathering momentum to the point where the armed forces were getting
rebellious – they wanted more money. When Mugabe caved in to these
demands, the Zimbabwe Dollar plunged.
Shortly after Mugabe was elected President in 1980, the Zimbabwe
Dollar was worth more than the US Dollar. The ongoing abuse of the
financial system eventually produced a runaway inflation. The largest bank
note issued in Zimbabwe was for One Hundred Trillion Dollars and is
pictured below. These notes are now collector’s items and I had to part
with US$2 to a street vendor to acquire the note depicted below.
The worst trauma for ordinary people during the hyperinflation was lack of
food. This was due mainly to the imposition of price controls. If the cost
of production of an item was $10 and the price controllers instructed that
the item could only be sold for $5, the business would soon go bankrupt if
they sold at the controlled price. The result was that production and
imports just dried up, hence the empty shelves in the supermarkets.
People survived by shopping in neighboring countries and relied on
assistance from South Africa and the aid agencies. Companies
survived the hyperinflation with great difficulty and often by ignoring
laws. Although companies were left without debt post February 2009, they
were also left deficient in working capital and had dilapidated plant and
equipment. Regular repairs and maintenance could not be afforded.
Most companies now require urgent recapitalization.
There has been a major exodus of Zimbabweans over the years, estimated at
about 3 million prior to 2008. Many of these were qualified people who
were subjected to Mugabe’s campaign of terror. During the latter stages of
the hyperinflation there was a further exodus because people were
starving. Most of these people went south into South Africa. The current
population of Zimbabwe is estimated to be between 10 and 12 million
people, so the numbers that have fled the country are significant relative
to the total population.
Current economic activity is strongly supported by remittances from
Zimbabwean migrants to their families in Zimbabwe. Once the political
situation settles down, it is likely that many of these migrants will wish
to return to Zimbabwe. Some have already done so. Many activities
that perished in the hyperinflation, such as insurance, are now starting
Credit financing activities are starting to revive. Visa credit cards are
once again operating successfully in Zimbabwe, others will surely follow.
Banks have had both sides of their balance sheets devastated by
hyperinflation and now have no lender of last resort to call on.
They are understandably cautious in lending the deposits that are slowly
filtering back into the system. Banks also lost much of their equity
capital. Barclays Bank survived because it had 40 branches where the bank
owned the real estate and had a strong parent. These properties plus some
foreign currency holdings represent the equity capital on which the bank
In a country with no debt, only assets, people and companies are under
geared. With the ultra cautious lending policies of the banks, there is a
huge opportunity for foreign investors in the credit purveying industry.
There has been a sharp rise in economic activity since February. Real
wages have risen substantially compared to a year ago. Whatever workers
were paid in Zimbabwe Dollars during the hyperinflation bought virtually
nothing. Now even the minimum wage of around $100 per month allows for
basic purchases. A 10kg bag of maize meal, a staple in the local diet,
costs $3.50 and lasts for two weeks. Demand for products and services is
increasing rapidly. Corporate profits are rising, leading to greater tax
revenues for the Government, augmented by rising VAT taxes. Greater
Government revenue allows for greater Government spending.
This self-reinforcing loop will continue. The improvement in the
economy will become dramatic once Mugabe leaves the scene. At that
time aid agencies, NGO’s, Charities and foreign governments will start
injecting large volumes of funds and assistance into the country. They
refuse to commit any meaningful funds while Mugabe is still the President.
With Mugabe out of the way and the economy recovering strongly, one could
reasonably anticipate that a large proportion of the Zimbabweans living
overseas will return to the country bringing welcome skills and capital.
Indeed foreigners will also be attracted to investing in the country in
It is fascinating to see how rapidly the economy is recovering. It is a
great testament to what can be achieved in a free enterprise environment
by the elimination of controls combined with the institution of new money
that people trust. It needs to be money that their Government cannot
create via the printing (or electronic) press.
The economic future of Zimbabwe is likely to be in mining,
agriculture, tourism and service industries, especially those providing
infrastructure and maintenance facilities. There remain many
problems, not the least being chronic unemployment, but the future looks
bright beyond the Mugabe horizon. The population is amongst the best
educated in Africa and most people can speak English. With the Zimbabwe’s
natural assets, there is scope for realistic optimism about the economic
future, especially once the current political difficulties are overcome.
The population has been brutally traumatized by the hyperinflation and the
political situation. They really deserve a decent change of fortune.
THE POLITICAL SITUATION.
To understand what has happened and is happening in Zimbabwe, it is
necessary to look at some history. Modern Zimbabwean history began in 1890
with the arrival of the Pioneer Column of white settlers under Leander
Starr Jameson at the behest of Cecil Rhodes. Initially they were searching
for gold but when nothing of importance was found, they turned to pegging
land for farms. The initial settlers were fortune hunters, grabbing land
at every opportunity.
Prior to the arrival of the white settlers, the Shona tribe occupied
the northern part of the country called Mashonaland, and the Ndebele tribe
were ensconced in the south, called Matabeleland. In 1896 these
tribes rebelled against white rule in one of the most violent episodes of
resistance in the colonial era. In Matabeleland a somewhat dubious
settlement was negotiated but in Mashonaland the Shona chiefs were hunted
down until all resistance ceased. No Peace Treaty was ever signed with the
The Shona, in particular, have never forgotten this. Mugabe, who is from
the Shona tribe, has made it his life’s work to recover for his people the
land that was “stolen” by the whites. He has repeated this statement on
book by Martin Meredith titled “MUGABE: Power, Plunder and the Struggle
for Zimbabwe” published by Jonathan Ball, gives a very readable account of
the recent history of Zimbabwe up to 2006, prior to the worst of the
hyperinflation. It is required reading for anyone wishing to gain a
balanced understanding of what has happened in that country with an
emphasis on the period since Independence was granted in 1980.
Returning to the white settlers, there was always an unfair division of
land between whites and blacks. This was accentuated after the Second
World War when Rhodesia benefited from an influx of white immigrants.
Farming boomed as a result of better equipment, better farming methods and
better seeds. The number of white farmers increased from 4,700 in 1945 to
8,600 in 1960, increasing the demand for white occupied land. The black
population was also expanding and African grievances over land eventually
swelled to voluble protest. This is the background to the land invasions
on white farms over the last decade. Mugabe was making good his promise to
return the land to his people.
In 1962 Ian Smith’s Rhodesian Front party swept to power on their policy
of maintaining the status quo for the white farmers. During the 1960’s
Britain was in the process of granting independence to its various
colonies. Smith attempted to negotiate independence for Rhodesia but
Britain would only accede to this if it was on the basis of democratic
(one person, one vote) elections. Smith was intent on entrenching white
minority rule “forever”, so Britain refused.
On 11 November 1965 the Smith government made a Unilateral Declaration of
Independence which they claimed had precedent in the USA Declaration of
Independence in 1776. This triggered a range of reactions. Sanctions were
imposed by Britain and the United Nations. The black population was
outraged, leading to the formation of black resistance movements aimed at
changing the government.
Smith introduced the Law and Order (Maintenance) Act which allowed
the government to literally do anything without recourse to the Courts or
rule of law. One of his first acts was to imprison four black
nationalist leaders without trial or publicity. Mugabe was one of these 4
and he spent the following 11 years in prison. He was released in 1974
during a brief cease fire between the Rhodesian forces and the liberation
movements. Mugabe took the opportunity to escape across the border into
Mozambique where he became leader of the resistance movement and was
instrumental in organizing many terrorist raids on farms in Rhodesia.
The terror war became increasingly vicious on both sides. Rhodesian forces
regularly crossed into neighboring territories, dealing brutally with the
local population suspected of harboring terrorists. The neighboring
countries eventually insisted that a peace deal be consummated. They would
no longer tolerate liberation movements on their soil. Mugabe reluctantly
agreed. The guerrilla war had spread to all corners of Rhodesia, forcing
Smith to also come to the negotiating table.
In early 1980 the country became independent and changed its name to
Zimbabwe. Mugabe stunned everyone by gaining 63% of the popular vote at
the first elections. Despite claims of vote rigging and intimidation of
voters, the numbers were so overwhelming that it was conceded that Mugabe
had won and he was elected President of Zimbabwe. People just wanted
Mugabe, despite initial claims of moderation, set about entrenching
himself as president, a position he wanted to claim for life.
Surprisingly Mugabe did not repeal the Law and Order (Maintenance) Act
that the white regime had used to cover its many evil acts. Mugabe relied
on its terms to justify the terrible things that he perpetrated over the
ensuing 3 decades.
These atrocities are recorded in Martin Meredith’s book “Mugabe” and there
is no point detailing them now. Suffice to say that he was bent on
eliminating his opponents and intent on punishing anyone who criticized
him. His Zanu-PF people infiltrated the army and the police force and were
at his beck and call to act as thugs when required. Faithful people were
rewarded with a range of patronage that he dispensed.
He found a compliant partner in the Governor of the Reserve bank, which
became Mugabe’s source of funds to pay his people and to dispense his
patrimony. Needless to say, much of the money came from printing new
Zimbabwean dollars, which caused inflation to gradually increase. Finally
the army and police forces to got cranky, publicly demanding much higher
The following is extracted from Wikipedia.org:
On 16 February 2006, the governor of the
Reserve Bank of Zimbabwe,
Gideon Gono, announced that the government had printed ZW$20.5 trillion in
order to buy foreign currency to pay off
In early May 2006, Zimbabwe's government announced that they would produce
another ZW$60 trillion.
The additional currency was required to finance the recent 300% salary
increase for soldiers and policemen and 200% increase for other civil
servants. The money was not budgeted for the current fiscal year, and the
government did not say where it would come from. On 29 May, Reserve Bank
officials told IRIN that plans to print about ZW$60 trillion (about
US$592.9 million at official rates) were briefly delayed after the
government failed to secure foreign currency to buy ink and special paper
for printing money.
On 27 June 2007, it was announced that central bank governor
had been ordered by President
to print an additional ZWD$1 trillion to cater for civil servants' and
soldiers' salaries that were hiked by 600% and 900% respectively.[53
Official, black market, and OMIR
exchange rates Jan 1, 2001 to Feb 2, 2009. Note the
Clearly Mugabe was responsible for the hyperinflation. The causes were
those always present in these events. A weak economy, large government
budget deficits, inability to borrow funds combined with the political
decision not to cut Government spending. Governments are reluctant
to lay off government employees, especially those related to the armed
forces. The latter might invite a military coup. The only source of
funding left is the creation of new money.
A very important factor in assessing the current situation is that
Mugabe no longer has his own private source of funds to continue with his
system of patronage. The army, police force and civil servants are paid by
the Unity Government. Mugabe’s power base must be disintegrating rapidly.
He has also become very unpopular. It seems unlikely that he could
win an election again, even if he managed to get his thugs to resort to
intimidation. People identify Tsvangirai and the MDC with the new monetary
disposition and the improved economy, while Mugabe is correctly blamed for
the trauma of hyperinflation.
There is also the question of sanctions. In recent speeches Mugabe has
said that it was time for sanctions against Zimbabwe to be removed. This
is nonsense. It is Mugabe and 200 of his associates who are under sanction
by the US and other countries under the Zimbabwe Democracy and Economic
Recovery Act. This prevents them and their families from traveling
overseas and freezes their external bank accounts.
This combination of circumstances, combined with the fact that he is 86
years old, suggests that Mugabe must be under pressure to resign. It is a
logical deduction that behind the scenes Mugabe must be attempting to
negotiate a form of amnesty against prosecution. The next month is
important as the SADC, which guaranteed the terms of the recent Unity
Government, has given Mugabe until 6 December 2009 to comply with all
outstanding issues. Details of developments and current Zimbabwe news can
be found at
COMMENTS and CONCLUSIONS.
Having seen the impact of hyperinflation at close quarters, my view
is that this is the least desirable method for eliminating excessive debt.
The population has been traumatized physically (starvation), mentally and
financially. Most people did not have foreign assets or local tangible
assets, so lost virtually everything. The companies survived using unusual
skills, ignoring laws and protecting working capital by holding foreign
currency or purchasing equities.
The alternative option for eliminating excessive debt is to take the tough
political decision of allowing ‘too big to fail” companies to fail and
accept the unpleasant economic consequences. Excessive Government spending
should be curbed. A sound currency, elimination of all rules and controls
in a completely free market will produce a much better result in the long
term. If this option were adopted, the short term would likely be
extremely unpleasant, possibly including an economic depression. It is
doubtful whether any Government today has the courage to take this route.
Sadly this implies that the world is headed down the path of currency
destruction that will eventually result in a Zimbabwean situation for the
elimination of debt. Zimbabwe may yet prove to be a role model,
demonstrating how rapidly a country can recover from the devastation of
hyperinflation and the elimination of debt.
In Zimbabwe the serious problem of the land issue remains to be resolved.
Morgan Tsvangirai indicated that security of land tenure was vital. One
option is the Zambian model where all land was nationalized followed by
the issue of 99 year leases to property holders. The MDC will also look at
some form of compensation for farmers who have been dispossessed. They are
anxious to see a land audit set up, but Mugabe is stalling on this for
On mining, the MDC are examining a bill that will require concessions to
be developed in a shorter period, perhaps 2-3 years, compared to 100 years
currently. They will aim at a combination of royalties and taxes to
provide the State’s share of mining profits rather than insisting on a
percentage of local ownership.
My family was concerned about me going to Zimbabwe. “Don’t you know that
it is a dangerous place?” I admit that I was nervous too. International
news on Zimbabwe seems to be preoccupied with violence, particularly the
brutal land invasions and physical intimidation in the political sphere.
The fact that foreign media have not been allowed into the country until
the past few months has resulted in a false image being projected.
Mugabe’s thugs have closed down newspapers that were critical of his
regime, so news has tended to be pro-Mugabe.
We arrived late on a Saturday evening and due to the massive time change,
I woke very early on Sunday morning. I decided to take a walk around
central Harare and found my way to the Harare Catholic Cathedral. There
were Masses in the local language at 7am, 8am, and 9am, followed by an
English Mass at 10.00am. All four Masses were standing room only, as can
be seen in the photograph below.
Standing room only at four consecutive Masses at the Harare Catholic
The people were well dressed and looked well nourished. They were all
friendly and affable. My view that Zimbabwe was a dangerous place did a
dramatic about turn. These were peaceable people who wanted nothing but a
quiet life. Walking around the streets, I never felt harassed physically.
The curio sellers at Victoria Falls were a pain, but so are street vendors
everywhere. They were certainly all friendly and intelligent. They could
get involved in a serious conversation and all had strong views about
economics and politics. Obviously it is Mugabe’s thugs that people fear,
but that is becoming less of a problem.
All my preconceived ideas about Zimbabwe were smashed. I now believe it
has a bright future, especially once Mugabe leaves the scene. I was
sufficiently encouraged by the prospects for the economy and sufficiently
impressed by the high quality of the senior executives of major companies
to make some small initial personal investments on the Harare Stock
Anyone looking for a safe, interesting, place to visit should consider
Zimbabwe. I think that you will be pleasantly surprised and have an
10 November 2009.
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