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'Zimbabwe needs bailout or political breakthrough'

by Staff reporter
24 Jun 2020 at 17:44hrs | Views
Zimbabwe cannot revive its economy without an international bailout, but any bailout is most likely to come with political and economic conditions attached to it. This comes as the economy is forecast to record its steepest decline in GDP in recent years at a contraction of between 12-15%.

Economist Tony Hawkins told a CAA Business School webinar on Monday that the economy needs to raise international funding but the was impossible at the moment because the country is yet to clear its arrears to the World Bank and African Development Bank. Zimbabwe owes the multilateral institutions about US$2 billion in arrears.  He said based on experiences elsewhere the IMF would have organised a donor's meeting which could ensure that Zimbabwe's debt is cleared. But relations with the IMF were strained following the collapse of the Staff Monitored Programme.

"We are stuck in a cul-de-sac, in the absence of an international bailout, Zimbabwe would require some sort of political breakthrough."

Hawkins said the country was in the midst of a perfect storm characterised by economic decline which started in 2019 and has been made worse by the impact of Covid-19 and lockdowns. This has created a deteriorating socio-political climate. The policy response of Government has been to control money supply to curb forex demand, implement draconian measures to tighten currency controls, subsidies to control and slow inflation while they have tabled an $18 bln recovery package to counter the effects of the coronavirus pandemic.

What government had announced last week were panic measures which were not thought through.

Hawkins was pessimistic about the success of the foreign currency auction system which he said was highly controlled.  "The auction system is cluttered with restrictions," he said. These include an import priority list, forex surrender requirements, requirements for businesses to trade at the auction rate for a week and even where bids have not been met, compulsory dual pricing.

Hawkins said the increase in the civil servants' wage package would not only fuel inflation - forcing the RBZ to print money - but will also set the stage for widespread parastatal and private sector wage demands.  "The plan to pay civil servants and some pensioners in USD is a major concession, which employees across the economy will seek to access."

He noted that this was a major retreat on the matter of principle as again and again Government had said it would not do so. "Yet it has just created yet another new currency (RTGS US dollar), which is restricted in use. We are doing pretty much what we did before with the bond note"

"Alongside this is the bungled proposal of 350 000 nostro accounts or more which could be short-lived as the COVID-19 allowance could last for only three months. This will have a huge cost for banks, already under pressure. They will have to manage this huge increase in the number of nostros and they will have to produce cards."

Hawkins pointed out that currency devaluation would not work either because exports are constrained. The supply side is weak because of the drought and other factors. On the other hand, demand is weak globally including in the region.  Imports are inelastic and this will translate to more currency weakness.

The USD remains the currency of choice with all stakeholders unwilling to hold local currency. Hawkins predicted that Zimbabwe could be fully redollarised in the second half of 2020.

"It's hard to manage and operate your currency after two bouts of hyperinflation. Next knee jerk reaction would probably be some form of price control. These will not work and the only viable exit path is redollarisation. The timing is impossible to predict but it looks like we will redollarise in the second half of this year.

"Redollarisation is not a panacea, it could become a staging post for a political accommodation with the opposition. Perhaps another Government of National Unity".

Zimbabwe has the second highest rate of inflation in the world after Venezuela which was at almost 300 000% in April.

Source - finx