Download THE SNAKE THAT ATE ITSELF L ONCE THE BREADBASKET OF AFRICA, ZIMBABWE IS

ZIMBABWE | ICAEW ■
THE SNAKE THAT
ATE ITSELF
ONCE THE BREADBASKET OF AFRICA, ZIMBABWE IS
TENTATIVELY EMERGING FROM ECONOMIC CATASTROPHE
L
ast month’s announcement that UK inflation
had risen to 4% prompted unease about the
country’s fragile economy and criticism of the
Bank of England’s interest policy. This acerbic
reaction might have met with bemusement from
observers elsewhere.
In Zimbabwe, for example, normal trading was almost
impossible by the end of 2008 due to the incredible rate of
inflation, calculated by one report to be at an annualised
percentage rate of 6.5 quindecillion novemdecillion – that
is to say 6.5 followed by 107 zeros (way worse than the
mere 409,000% we had feared – see Accountancy August
2007 p112)
Even the authorities, which had clung to the belief that
inflation could be controlled by pricing legislation, were
starting to concede that the battle was lost. They began to
ACCOUNTANCYMAGAZINE.COM | APRIL 2011
permit limited trading in foreign currency for those with
special licences. Previously, trade in other currencies had
been viewed by the government as ‘economic sabotage’
punishable by confinement in a disease-ridden jail without
access to lawyers. In February 2009, the acting minister of
finance legalised pricing and payment in foreign currencies.
Such a high inflation rate hits different areas of the
economy in different ways. Currency transactions split
into two kinds: actual folding money was used for most
transactions large and small, while money ‘in the bank’,
which could only be moved by transfer (a letter of
instruction taking the place of a cheque), was used for
large transactions, tax settlement and investment activities.
Eventually, the latter option became only possible in a
narrow slice of the economy, including the stock exchange
and tax payment.
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■ ICAEW | ZIMBABWE
Money was being ‘printed’ for both methods, but at
different speeds. For the cash market, banknotes eventually
reached a denomination of 100 trillion ‘Zim’ dollars. It
was an ironic blessing that printing more banknotes was
ultimately limited by printing capacity, ink and paper
supply, and time.
Unfortunately, in the bank market, no such limitation
existed. The central bank could ‘print’ money by simply
writing a journal entry indicating that money had been
transferred. This situation allowed Zimbabwe to achieve
such a mind-boggling level of inflation.
TWO INFLATION RATES
The result was two co-existing inflation rates. Inflation
in the ‘bank’ sector was higher than in the ‘cash’ sector,
eventually approaching 100% a day. The Zim dollar had, in
effect, become two currencies with, at one point, a ‘cash’
dollar worth 250bn ‘bank’ dollars.
International Financial Reporting Standards presuppose
some basic conditions including a logical relationship
between inflation rates, exchange rates and interest rates.
Clearly, when US$10 (£6.17) can buy either Z$10,000 or
Z$2,500 trillion, and when exchange rates differ around
the country, accounting presents an interesting challenge.
The oft-touted ‘report in US$’ is meaningless with that
translation range.
One result was the collapse of the tax system. By the
time payments in arrears were being collected, they were
too small to have meaning. The central bank effectively
became the taxing authority by printing money and
giving it to the government, essentially taxing the money
in the population’s pockets and in the banks, causing the
destruction of savings.
Another source of government funds was the official
exchange rate. Exporters would sell produce for US dollars
and be entitled to retain 70% of the proceeds as US
dollars. However, they were required to ‘sell’ 30% to the
government at the official exchange rate (a tiny fraction of
the real rate). This was more of a tax system than a rate of
exchange. Connected individuals profited hugely by buying
US dollars at this rate, but few exporters could shoulder
a tax burden of 30% of gross income - exports withered.
Anything denominated in Zimbabwe dollars was halving in
value each day. This kind of snake quickly eats itself.
WHO WAS TO BLAME?
With the economy in freefall, the official position was
that the country’s woes were due to western sanctions.
However, government economic policy was the major
factor in the catastrophe.
Policy makers were economically illiterate but believed
themselves infallible. Important decisions were made by
people with political clout but no idea of how an economy
worked. Only a minority had the technical competence
to see the problems ahead and advice from international
organisations and locally-based experts alike was ignored.
Any criticism was treated as political rather than factual.
The governor of the Reserve Bank issued several public
warnings as did a couple of ministers of finance. The
former was cowed into silence while the latter were vilified
as traitors.
Examples of the Zimbabwean government’s economic
incompetence abound. Printing money was publicly cited
at the highest levels as brilliant, not because ‘quantitative
106
‘It was an ironic blessing that printing more
banknotes was ultimately limited by printing
capacity, ink and paper supply, and time’
easing’ would provide market stimulation, but because
printing notes somehow directly increased national wealth.
When inflation resulted, price controls were introduced
without any attempt to address the cause. The result was
that the shops emptied and formal business ground to
a halt.
Staggeringly, when it was decreed that the price of
beef in the shops should be reduced by 50%, it came as a
complete surprise that farmers (ironically including most
senior politicians and the authors of the decree) would be
paid less for their cattle.
In another bizarre episode, when a n’anga (a traditional
healer/witchdoctor) claimed to have discovered purified
diesel oil pouring from a plastic pipe on a hillside, the
nation was told that it had the potential to save the
economy. Ministers rushed to bestow her with gifts to
curry favour.
WHERE NEXT?
So where are we now? Zimbabwe now has a government
of national unity. This marriage of inconvenience does
not work well politically, but the related infighting and
bickering largely means that there is limited government
interference in business and so recovery is taking hold. GDP
growth last year was about 8.5% and may increase in 2011.
Zimbabweans find the change miraculous in its speed
and its extent. The introduction of foreign currencies
has removed the government’s primary instrument with
which it could abuse the economy: printing money can no
longer be used to reallocate wealth from the productive to
the parasitic.
The shops are full of local and imported goods, there is
fuel in the filing stations and prices are largely stable. The
stock exchange has grown fourfold in US dollar value and
brave early investors have made handsome real gains. Jobs
are being created, but without much net gain as some
businesses are failing.
Danger lies in ZANU PF’s belief that it must maintain the
illusion of infallibility and deny accountability to protect its
position of power. Concern remains about what it might
do to cling to power. However, it now suffers from a huge
economic credibility gap. It absolved itself of any culpability
and entirely blamed western sanctions for the economy’s
collapse. Nevertheless, the truth is there for all to see: the
economy is now recovering quickly despite the alleged
sanctions, strongly suggesting that sanctions were not the
primary cause.
Although reverting to the failed policies of the recent
past would undoubtedly be political suicide, these policies
made some people very rich and a return cannot be ruled
out. Generally, however, business believes that damage
resulting from such short-term populist measures would
be apparent early enough to allow a u-turn before too
much harm was done. A temporary return would be a mere
stumble on the upward slope of recovery.
A warning: It should be noted that those of us still doing
business in Zimbabwe are optimists.
The author of this article is a
member of the Global Accounting
Alliance working in Zimbabwe. A
previous article was published in
August 2007 p112.
ICAEW is working with local
bodies around the world to
help build capacity in the
financial and accounting sectors.
For details, call Mark Campbell
on +44 (0)20 7920 8448 or visit
www.icaew.com/capacitybuilding
(see also ICAEW in Tanzania p88)
APRIL 2011 | ACCOUNTANCYMAGAZINE.COM