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.
I 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
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.
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 to resuscitate.
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 currently operates.
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.
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 those circumstances.
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)
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 Shona tribe.
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 many
A 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
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 peace.
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 pay.
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 IMF
arrears. 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 Gideon Gono had
been ordered by President Robert Mugabe to
print an additional ZWD$1 trillion to cater for civil servants' and soldiers'
salaries that were hiked by 600% and 900% respectively.[53
market, and OMIR exchange rates Jan 1, 2001 to Feb 2, 2009. Note the logarithmic
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
travelling 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 http://www.zimbabwesituation.com/
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 obvious reasons.
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 Cathedral.
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
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 Exchange.
Anyone looking for a safe,
interesting, place to visit should consider Zimbabwe. I think that you will
be pleasantly surprised and have an enjoyable trip.
all the other articles written by Alf Field
Disclosure and Disclaimer Statement: The author is
not a disinterested party in that he has personal investments gold and silver
bullion, gold and silver mining shares as well as in base metal and uranium
mining companies. The author’s objective in writing this article is to
interest potential investors in this subject to the point where they are
encouraged to conduct their own further diligent research. Neither the
information nor the opinions expressed should be construed as a solicitation
to buy or sell any stock, currency or commodity. Investors are recommended to
obtain the advice of a qualified investment advisor before entering into any
transactions. The author has neither been paid nor received any other
inducement to write this article