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Sanctions do hurt the economy

03 Nov 2019 at 06:49hrs | Views
The United States ambassador to Zimbabwe Brian Nichols, was unusually hyperactive last week.

The diplomat attempted to counter the government's narrative on the detrimental effects of sanctions to the economy, alleging instead, that corruption was responsible.

As if to portray the US as the "good guy", he went on to stress that the US had contributed US$3.2 billion in bilateral assistance to Zimbabwe since 1980 and continues to be the country's largest donor.

Nichols was certainly riding on the emotions of a polarised nation; and he surely got his audience. The fact, however, is sanctions do hurt — and in a big way.
The currency challenge is arguably the biggest issue affecting Zimbabwe's competitiveness.

Fundamentally, two conditions must be met to address the issue: firstly, there must be some form of external debt bailout or massive injection of foreign inflows and secondly, there must be some internal devaluation (to boost national competitiveness and increase exports).

In a nutshell, that's the formula to fix the issue: when Zimbabwe does eventually solve the cash crisis, these two conditions will have been satisfied.

It is the first condition that restrictive measures seek to undermine. Under Zidera, the US and her allies will vote against any debt bailout until prescribed reforms are met.

The argument, for now, is not whether reforms must happen, neither is it about corruption. It is about the impact of sanctions.

Granted, Zimbabwe has outstanding arrears, but in the absence of sanctions, that is ordinarily fixed by an immediate debt relief package (read Greece).

Instead, by weaponising the US's vast powerful network and grip on global finances, the restrictive measures effectively isolate Zimbabwe from global financial system, exacerbating the crisis.

The mere presence of any level of sanctions deters major banks, who simply avoid dealing with Zimbabwean transactions due to the risk of hefty fines in the event of a breach. That is crippling.

In the absence of external debt relief, the government is then forced to borrow locally (see chart).

Of course, no government can sustain operations without credit lines.

The government raises funds by issuing public debt (treasury bills), to finance recurrent costs like government wages and to plug budget deficits.

That internal borrowing cycle inevitably spirals into rising inflation and cash challenges.

The political objective of the sanctions regime is too obvious to be missed.

Surely if corruption was the main culprit, why did it have less of an impact between 2009 and 2013 despite similar rampant allegations?

The fact is even though restrictive measures existed between 2009 and 2013, there was a relaxation towards private sector foreign inflows (a key requisite for currency stability).

Over US$3 billion in portfolio investment was injected privately, which supported government revenues and helped maintain monetary stability despite similar corruption allegations.

That temporary relaxation was reversed by capital flight (massive cash externalisation) post 2013, inevitably reigniting the currency crisis once again.

But why is a currency crisis a weapon of choice? With a currency crisis, creating long-term productive capacity becomes a mammoth task.

Major export earners like mining, agriculture and tourism are frustrated through increased costs of doing business (volatile currency) in addition to restricted access to international markets.

This negatively impacts government revenues and clearing debt arrears becomes insurmountable.

The currency continues to suffer from never ending inflation.

As the cash crisis deepens, the economy screams, leading to social unrest. That's the primary objective of imposing sanctions in the first place, no?

Consequently, the economy today is half its size, as evidenced by capacity utilisation which hovers below 50%.

That means around US$20bn of economic potential was lost last year alone.

Now imagine, Zimbabwe is approaching 20 years under sanctions. By comparison, the Ambassador's own estimates of lost receipts from corruption were around US$1bn per year.

As if to show empathy for the partly sanctions induced economic challenges, Western embassies are quick to point out their "help" in the form of aid their countries are extending.

True, Western nations continue to support the country through various aid programmes.

In fact, Zimbabwe even receives three times as much aid in a year, than investment (see chart). But is that good for the economy in the long run?

Foreign aid is actually crowding out much needed private sector investments which would otherwise ignite economic growth, boost job creation and support self-sustenance.

Readjusting the foreign inflows mix in favour of investment would in fact mean that over a number of years, the average Zimbabwean will be self-sufficient and not reliant on any foreign humanitarian support. That, in my view, is true freedom.

Contrary to popular belief, prioritising aid over investment actually perpetuates poverty to the extent that it promotes hand-to-mouth existence.

Ultimately, there is no free lunch. Such programmes actually benefit donor countries, as in return they earn considerable soft power and gain significant leverage over the economic affairs of the host governments.

The fact is the losses from the effects of sanctions alone far exceed the cash handouts dished out by Western envoys.

Sanctions do stack high up there among the major reasons for the economic challenges bedevilling the nation. That, of course, does not absolve other causes!

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Hopewell Mauwa is a strategic analyst based in London. He graduated from the University of Cambridge and holds an MBA from Warwick Business School. He writes in his personal capacity and can be contacted on hopewell.mauwa@cantab.net

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