By Eddie Cross
A State of Emergency
I can recall times when a state of emergency was declared and almost always it was in response to violence or political events. But when conditions reach the point where the very livelihoods of the people are at stake I think the State should consider declaring a ‘state of emergency’. If that was the case would such a declaration be justified today in Zimbabwe? It is an interesting thought.
In many ways I would think that there are substantive conditions prevailing in the country that might justify such a declaration. Had I been President in 2008, I certainly would have made such a declaration – inflation was doubling prices every three hours, we had 150 000 cholera cases in Harare, the capital City, there was no fuel in the service stations and nothing in our stores. Schools were closed, hospitals acting as mortuaries. Average civil service salaries were US$5 per month. Power supplies intermittent. Do you remember that?
Today, similar, if not as severe, conditions exist. Inflation is moving towards hyperinflation levels (50 per cent per annum), we have 8000 cases of cholera in Harare, fuel is in short supply, shortages are appearing in our supermarkets. Hospitals are short of nearly everything and disposable incomes are declining fast. On the surface things look normal but when you scratch a bit, it is clear we are headed for a crash if nothing is done. Last week the informal sector valued the money in our banks (nominally USD) at 2.20 to 1, a 20 per cent devaluation in a week – the previous week it devalued by 12 per cent. Clearly they see the crisis even if we do not.
So why and what should be done to reverse these developments? That is what confronts the new Government just put together by the President. Can they handle this new crisis? Well that is to be seen but overall the President seems to have put together a team that is competent and has some capacity. 10 women – a big step forward, 4 Professors, 5 non-political technocrats and the overall size down 40 per cent with the average age down 30 per cent. At the core, the appointment of an internationally recognised economist as Minister of Finance.
Just as important, although they are not being discussed in the public arena, the New President is making sweeping changes in the Civil Service and the Armed Services.
The emergency we face has many aspects – before he died I told Morgan Tsvangirai that, in my view, the situation prevailing in Harare was essentially a state of emergency. When you have a capital City with 6 million people living in and around it and dependent on the City for essential services and the City can only deliver safe water to half its citizens and where 95 per cent of its water borne waste goes into its raw water supplies untreated, you have a situation that, if it’s not considered an emergency, will soon become one. That is the situation in Harare and inevitably both cholera and typhoid have become endemic.
When the former President, Robert Mugabe (that sounds so good!!) gave the instruction to raise salaries by a third after he won the 2013 elections, he was violating one of the most important laws of economics – spending more than he was collecting in tax. He did just that before, and simply ordered the Reserve Bank to print more money. Eventually they were printing so much money that a trillion Zimbabwe dollars (worth 1 to 2 US dollars in 1980) would not buy a loaf of bread or a coke in 2008. Now we no longer have a local currency, they simply print money electronically – worked for about two years and then the market discovered that what they had in their books was not real money.
The consequence today is hyperinflation, tomorrow the threat of a real collapse of the monetary system and even the wider economy. The process is destroying value, distorting prices and driving the formal economy out of business. When I met the new Minister of Finance, I told him he had a month to make essential changes, last week a very senior banker told me he had days to do so. That, in economic terms, is an emergency.
On a regular basis I watch the world news and very frequently I see the situation in Venezuela discussed. Here is a major oil producer in a potentially rich country, suffering the same crisis. The outcome of their Governments policies are the same as here and the solutions are the same. In 2008 we had massive migration of people to neighbouring countries – just like Venezuela today. If things get much worse here, the flight of people to other parts of the world will resume.
Then there is the foreign exchange crisis. Not enough money for anything – wheat, maize, fuel, essential medicines, electricity imports. Business cannot import spares or essential raw materials, cannot service external obligations and pay their foreign shareholders dividends. We can take such conditions for a while, stocks, external credit lines and suppliers patience, but eventually it catches up with us and, like a noose around your neck, gradually strangles our economy.
We may not recognise the symptoms but every businessman who needs hard currency to survive knows that being strangled is an emergency, declared or not.
One of the main reasons for a declaration of an emergency is to lift normal controls on decision making and to get everyone to understand that decisions have to be taken, and fast. In addition, people then understand why the State has to do things that may hurt in order to get the emergency under control. The man who has to deal with this emergency, apart from the President, is the new Minister of Finance. What does he have to do?
First a mini budget in the very near future, in that statement he has to report on the state of the fiscus and detail the problems. He has to give a clear analysis of expenditure against the 2018 budget and highlight areas that need immediate attention. In my personal view he has to raise additional revenues, he has to trim back State spending to the essentials and he has to ensure, overall, that he has dealt with the fiscal deficit which currently is headed for 40 per cent of all State spending and 16 per cent of the formal GDP. No progress is possible until he does that – like a traffic casualty in intensive care, stop the bleeding.
Then he has to deal with exchange control. The reason for this is that this is the policy which, like a rope around our necks, is going to strangle the economy. Why? I have always argued that exchange control is loved by crooks and Reserve Banks and no one else. The reason being that the system allows the transfer of real assets from the private sector which is creating wealth, to the crooks in our midst and they are many. The other reason is that the system gives power to the unseen officials who sit in offices in Government buildings and at the Reserve Bank, who create nothing and do little else that is productive, but they control who gets allocated what little hard currency (real money) is available at an artificially low price.
This means that they redistribute wealth, destroy the productive sectors of an economy and increase demand for hard currency because it is undervalued. The only way to cure this is to scrap exchange control completely and let the market fix the price and distribute what will always be a scarce commodity.
Strange as it may seem, if we do those two simple things, many if not most of our problems will evaporate. Sure we will still have to tidy up, but the real crisis or emergency is done.
This article first appeared on Eddie Cross’ website www.eddiecross.africanherd.com