ANALYSIS: Critical economic challenges facing Zimbabweans

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This an abridged version of an article recently published by the Election Situation Room

POST the 30th July 2018 harmonized elections, one of the most important questions that Zimbabweans have had to deal with is how the new government will resolve the deep and complex economic problems Zimbabwe is grappling with. Economic commentators have expressed mixed views and proposed a number of solutions to Zimbabwe economic woes.

This analysis seeks to provide a certain perspective on Zimbabwe’s economy and unpack some of the complexities that Zimbabwe faces as the development trajectory unfolds.

The foreign currency crisis

Zimbabwe like most frontiers and emerging economies often face the foreign currency challenge. This basically means the country has insufficient stocks of foreign exchange reserves and that makes it difficult to trade internationally. The failure to trade evidently has an impact on Zimbabwe, an economy that relies on foreign products and services.

The scope of this paper is not to discuss the causes but to evaluate the possible solutions and the likely impact on the poor and the bottom of the pyramid.

The government has already started putting in place measures/restrictions to address these, the Minister of Finance has stated that “in the interim, steps are being taken to establish a Foreign Currency Allocation Committee to promote efficient management of our foreign currency inflows” and presumably outflows as well.

The committee will help allocate the foreign currency reserves available to industries and purposes deemed a macroeconomic priority by the committee.

However, restricting currency flows in and outside a Zimbabwe has adverse effects on several industries. If the pharmacies and hospitals can’t get an allocation what is the impact on the health services delivery. What is the impact on welfare of the poor man and the community as a whole?

If Delta and Mutare Bottling do not get their allocation, to pay for their license fees and concentrates, what is the impact on the poor store owner or bottle store owner downstream?

If the foreign currency crisis is caused by Zimbabweans importing more than they are exporting then there is a huge possibility that Zimbabweans are creating jobs in neighbouring countries than they are creating in their own economy. The peasant farmer who survives on chemical fertilisers may be at risk of poor harvest as there is no foreign currency to buy critical chemicals and fertilisers.

Alternatively companies may be allowed to import using their own foreign currency reserves or lines of credit, but the product will be priced in hard currencies or at the going rate – out of reach for the ordinary peasant farmer.

Zimbabwe seems to be operating a fixed exchange rate policy but still allowing industry to use the parallel market rate to “bond” value their products. Is this legal?

The hidden subsidy

The perceived bond to USD value has created market distortions and dual pricing. Special consideration should be given to the ordinary Zimbabwean who was earning enough to cover the standard consumer basket. S/He still earns the same bond value but in real terms the same basket has tripled in value. Thus the same person now earns two thirds less.

Here is an interesting scenario that is obviously benefiting the ordinary citizens but hurting the economy. The poor man is buying fuel with bond at the perceived 1:1 valuation, yet to replenish the fuel stocks the country has to pay in foreign currency.

Using the real value and reality on the ground, if petrol is $1.40 bond, in real terms it is US$0.40 which is exactly the same price as Iran and Qatar. To the poor man it is a bonus to the pocket, but it comes with a cost of having to wait in the queue for long time and loosing productive time.

Indications on the ground are that a number of stations are now selling fuel in foreign currency and the number is growing by the day. It’s not a surprise that citizens will soon be asked to pay for their public transport fares in foreign currency yet they are only earning in bond and they are not allowed to trade the bonds on the parallel market for US$. Talk of January disease.


The continued decline in ODA in Zimbabwe has made remittances an important aspect of Zimbabwean economics. They are a critical part of DRM. However, remittances flowing through the formal channel seems to be going down due to the perceived 1: 1 exchange rate between the bond and the dollar.

Analyst are convinced the quantum of remittances has not changed, there is a possibility that remittances may actually have increased, but the channel has changed.

Over the past year Zimbabwe has seen the birth of grocery remittance businesses. Instead of the diasporans sending money home they are petrified that their loved ones may not have access to the funds. If they do, they may not be able to buy the same groceries with the same remittances in Zimbabwe as they would do in neighbouring countries.

Thus, instead of enhancing Zimbabwe’s domestic resources through remittances Zimbabweans are creating jobs in other countries through retail purchases.

Remitting to Zimbabwe has become increasingly expensive due to the unavailability of foreign currency at the last mile. As such remittance companies have to import the hard cash for the Zimbabwe market. That cash guarantee cost is obviously passed on to the customer, for that reason many diasporans are now using informal channels to remit to Zimbabwe.

Unfortunately these funds are not recorded, Zimbabwe has no data on them thus policy makers cannot plan based/depending on them. It is clear that these are the funds that are feeding the parallel market and hence economic dualization.

Whilst economists appreciate demonetisation may not be the best option since the country does not have enough foreign currency resources to fund the process of replacing bond value 1 for 1 with the US dollar.

There may be need to officially recognise the bond as quasi currency that can be traded on the foreign exchange market. The poor at the bottom of the pyramid continue to suffer from dual pricing, bond note inflation, unemployment and excessive taxes.

Sweden has the lowest number of paper notes and coins circulating in the economy, it is going cashless. Similarly, in Zimbabwe cash is no longer the King, Digital Money is. Zimbabwe can recall all the bond notes in the market and become the first cashless economy in Africa. That will be a better substitute title than a country facing liquidity crisis.

Promoting a culture of savings

Browsing through the budget one realises that there is not much that has been said about savings other than the savings bonds that are used for mopping up excess liquidity in the market. The poor rarely participate in these bond markets as such one would conclude that the poor are not saving and the Minister might have reached the same conclusion.

Wrong! Evidence on the ground suggest otherwise. We are still a low savings country and a lot has to be done to improve savings. Zimbabwe needs to start including the BoP in savings mobilisation. Economics has taught us that a country that does not save will not grow.

In the absence of foreign direct investments (FDI) and falling ODA, DRM through innovative products like digital finance can improve Zimbabwe’s position. It is wrong to assume that the people at the BoP do not save, it is equally wrong to exclusively concentrate on corporate savings in a country that has the largest informal sector in Africa.

The BoP needs are exactly the same as the needs of those at top of the pyramid and the government must realise that and promote channels and products that serve the poor. The poor need insurance and the poor are saving albeit informally. How much will the country benefit and what in the multiplier effect of an inclusive formal savings.

Every year end there are a lot of savings groups that share groceries to break a cycle – that is 12 month deposit that was sitting in a box without being used. Such deposit –nano deposits – can be formalised and loaned out to the same BoP communities that are depositing the funds. Consequently community development from the source.

The government need to look at private public partnerships in linking and formalising relationships between savings groups and formal financial services providers. From where Zimbabwe is coming, government must do away with credit only microfinance institutions especially in BoP communities.

Credit based microfinance has some negative impact on the community especially when customers fail to honour their commitments. Our MFI should now transform into fully fledged MFIs offering micro deposit function, these can be done digitally no need to visit the branch – we are a cash lite economy.

MFIs should offer insurance as well as credit. Rwanda has started a compulsory pension scheme for all its citizens. How much will the insurance sector collect from the informal sector if Zimbabwe launches a proBoP obligatory or non-obligatory insurance product that works?

Privatisation of Public enterprises

It appears the government is now ready to jump on to the privatization bandwagon again. Citizens are not sure if this is a matter of political and economic ideology or is it a means to raise revenue.

Whatever the reason, if this shift happens the government has told us that this will produce a significant improvement in service to the customer thus boosting efficiency and quality of remaining government units. Clearly privatisation shrinks the size of government which is what we all need.

Privatisation provides a platform for growth, but if growth is exclusive then the poor man at the BoP will not enjoy the benefits. Privatisation has to be inclusive for there to be economic development and for the poor man to benefit. C.K Prahalad in his book “The Fortune at the Bottom of the Pyramid” argues that “We have to learn from the successes and failures of the past; the promises made and not fulfilled.

Doing more of the same, by refining the solutions of the past— developmental aid, subsidies, governmental support, localized nongovernmental organization (NGO)–based solutions, exclusive reliance on deregulation and privatization of public assets—is important and has a role to play, but has not redressed the problem of poverty”.

Zimbabwe has had the Structural adjustment programs where privatisation was key. Have the programs helped in alleviating poverty? In as much as privatisation is key the hope for every Zimbabwean is to lead to “inclusive capitalism”.

About the ESR

The Election Situation Room provides a platform for effective citizen monitoring and domestic observation of electoral and national processes, where key stakeholders and the general public can feed information and receive timely updates on key national and electoral processes.

To achieve this, more than 40 organizations drawn from across the country and from different sectors have come together under the banner of the Election Situation Room. It has a Steering Committee that provide guidance and leadership to the ESR.