A Letter from Jeremiah
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A Letter from Jeremiah
About 3000 years ago Jeremiah wrote a letter and asked that it be delivered to every leader of the Jewish Diaspora in Babylon. In it he instructed the Jews in exile to make the best of what they have, to settle down and plant. Sometimes I feel just like those leaders in exile, living amongst people who are very different from my own, making the most of it and trying to help make it work for everyone.
Right now, those of us who live in Zimbabwe are faced with a multitude of problems, some external but most created by the way we govern ourselves. If I were a Jeremiah, what would I advise?
Firstly, I would point out that we have an abundance of natural resources, given to us as a nation by the God of the universe. He expects us to take care of what we have and to exploit it for the benefit of all our people. What is the reality? We found diamonds and instead of extracting them responsibly and selling them for the best prices we could get like Botswana, we stole 70 per cent of the gross revenue and banked the proceeds abroad. In Botswana the gift of diamonds has translated into free education and low taxes.
Then we discovered that we had gold in blue stone deposits that covered a third of our land resources. Instead of mining it properly and selling the gold to the best advantage, we allowed hundreds of thousands of small-scale miners to exploit the resources under terrible and dangerous conditions and then allowed criminal enterprises to buy the raw gold at half its value, export the product without value-add and again bank the proceeds abroad. Today the value of this criminal activity would balance the budget, raise living standards and service our national debt.
We have a vast array of mineral resources, mined properly and exported transparently would make a dramatic difference to every citizen. Instead, we are creating millionaires who live extraordinary lives among people who must fight every day to make a meagre living. This vast disparity in living standards does not go unnoticed and could lead to violence.
Secondly, the scrouge of corruption. A businessman said to me the other day that every foreigner coming into the country is approached for a bribe at the airport. I experience that in other African countries. We have a situation where a police roadblock is a collection point for a form of tax, stories about this activity and the money generated are legion. If you do not pay, they threaten to detain your vehicle. The environmental agency will arrive unannounced at your premises, find something wrong and you are faced with closure or a large fine and you pay a bribe just to make it go away. Our countryside is scattered with projects who clearly pay no regard at all to the environment. The EMA budget has expanded 20 times since they were allowed to keep fines.
The corruption at our borders is rampant and the cost to us as a nation is immeasurable. Corruption in the fuel industry has been going on for decades and costs as much as our fiscal deficit or the Ministry of Education. Corruption in national tenders is rife, increasing the cost of everything that the Government consumes. In China the theft of US$5000 will lead to execution, here a theft of millions goes unrecognized.
The next major issue I would raise would be monetary policy. After relative stability in the first decade of Independence we entered an era where we have seen a succession of monetary policy failures which have wiped out the value of a 100 years of enterprise, wiped out savings and crippled our economy. The reasons are many, but the main issues are an unsustainable fiscal deficit. If you spend more than you earn, you have to find a way to balance your budget. If you are a country, you can print money. If you print money then you devalue your currency; devalue bank balances, savings, earnings and pensions. Inflation is a tax on everything.
I thought we had learned that lesson, but right now we are running a huge fiscal deficit. Our Reserve Bank, under new leadership, is refusing to print money so we are not paying our bills. The new leadership of Argentina are claiming that the massive turn around in their economy is due to the fact that they have balanced their books for the first time in 136 years. They did it not dot it by increasing taxes but by slashing Government expenditure. Our Civil Service is overstaffed, and our pension bills grossly inflated. Fiscal indiscipline is everywhere. What have we done in the past six months? We have issued treasury bills; we have drawn down the overdraft at the Reserve Bank and we have printed money in different forms.
When this process destroyed our local currency in 2008, we dollarized and although that brought some discipline and low inflation, we did not notice that it undermined our productive sectors in agriculture and industry. We became an import dependent State for just about everything. We were a dumping ground for everyone.
When our new Minister of Finance introduced a new local currency in 2019, we had a temporary boom, food self-sufficiency was almost achieved, and industrial output rose. We created thousands of jobs every month. But we tried to control the exchange rate and as a result a substantial disparity emerged in the markets for currency and once again the local currency became unusable. When in April 2024 we introduced yet another local currency – the ZIG, it had a short honeymoon, but we were forced to devalue in September by 84 per cent and this did not stop the slide in the local currency.
In an attempt to halt and even reverse the depreciation of the ZIG on the open market, we have tightened monetary supply and maintained interest rates at punitive levels. We have also stopped printing money and required the Government to buy its hard currency needs from exporters using their own revenues. What is left from retentions is sold on the interbank market. As a result, the ZIG has strengthened substantially in open markets but is still nearly 20 per cent cheaper than the official rate. This maintains arbitrage margins and is also putting severe pressure on all formal sector businesses who are obliged to use the official exchange rate.
As a result, all sorts of things are happening – tax receipts from a shrinking formal economy are declining, we are losing jobs in the private sector, imports are increasing and smuggling activity has expanded exponentially, the informal economy is now probably 70 per cent of our GDP. Major business enterprises are losing money, investors are writing down their investments here and we are seeing many business closures or business rescue applications. Our formal economy is in crisis, even though real economic activity is booming, and we have a substantial trade surplus.
The real question is what to do? I suggest the following: -
- Take steps to curb corruption in all its forms.
- Formalise the gold industry and re-introduce MMCZ controls on exports of minerals and metals.
- Stop forced retentions of export earnings at artificial exchange rates.
- Switch all State revenues and domestic expenditures to local currency and balance the budget.
- Float the local currency on the interbank market.
- Set a target exchange rate for the local currency at a level which is below free market rates and start buying the currency off the market using printed local currency.
Allow a free-market economy to operate with no forms of price control. Lift all exchange controls on current account. As stability returns with low inflation rates, lower interest rates, allow the recovery of liquidity in banks. This could be achieved in a very limited time and the benefits would flow to the entire economy.
Eddie Cross
Harare, 26th January 2025