Prepared for Free Article on 15/06/2021 at 08:31. Authorized users may download, save, and print articles for their own use, but may not further disseminate these articles in their electronic form without express written permission from Africa Confidential / Asempa Limited. Contact email@example.com.
Economic meltdown and political anger raise doubts about the International Monetary Fund debt deal
When the government failed to pay army salaries on time on 14 July, it sparked fresh argument among ministers and ruling party barons about the way out of the economic morass. Army and other public sector salaries were also delayed for two weeks in June.
Hostility within the government is mounting towards the plan, which is championed by Finance Minister Patrick Chinamasa and Reserve Bank Governor John Mangudya and backed by President Robert Mugabe, for a rapprochement with the International Monetary Fund (IMF) and the World Bank (AC Vol 57 No 13, Political questions loom as debt deal is set for September).
Critics of the deal to repay some US$1.86 billion of arrears to the IMF, World Bank and African Development Bank argue that it should take second place to fixing the immediate crisis. The government's inability to pay salaries (some 93% of state spending) on time and the chronic shortage of US dollars are further undercutting the government's credibility as activists organise protests and stay-away strikes.
Critics inside the regime lack a coherent alternative to the Chinamasa/Mangudya plan, yet they are trying to marshal support from rival factions in the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) jockeying for position in the post-Mugabe transition. They point to rising social discontent, and more trouble ahead if the economic meltdown continues. They also have their eye on opposition parties, whose calls for a transitional government are starting to resonate.
For now, President Mugabe backs Chinamasa's plan, known as the Lima process; the negotiations were launched in Peru last year. Chinamasa, who stands outside the factional rivalries and is not a candidate for the succession, accompanied Mugabe to the African Union summit in Rwanda from 10-18 July. Asked in Kigali about the causes of the cash crisis, Chinamasa again blamed international sanctions imposed on his country over the past 15 years. In fact, most Western officials lost interest in sanctions some years back as they had neither constrained ZANU-PF nor helped its opponents.
Yet the most serious remaining sanction – the United States' Zimbabwe Democracy and Economic Recovery Act – is complicating the government's attempts to pay its international arrears and then negotiate new credits with the IMF and the World Bank. US officials oppose a deal with the IMF.
Although US directors of the Bank and IMF have no veto over loan decisions, their views carry weight. Some other directors say US scepticism could be useful in future discussions. Substantive negotiations over new IMF and World Bank loans are months away even if Zimbabwe pays its arrears by September as promised.
IMF spokesman Gerry Rice told journalists in Washington on 14 July that 'there is no financing programme under discussion with Zimbabwe at this point.' Rice added that negotiations would start only after the $1.8 bn. arrears had been cleared and the board had voted to normalise relations. Issues such as 'governance, accountability, transparency' would also be taken into account, said Rice. Others in Washington said those issues would come under the World Bank's purview.
After their missions to Harare last month, Bank and IMF officials suggest that the schedule for Zimbabwe's re-entry into the international financial system has slipped. Lazard Bank, which is advising Afreximbank on raising a $986 million seven-year loan for Zimbabwe, appears to be having difficulties in raising the funds.
Would-be lenders worry about the current financial crisis in Harare, and the implications of financially supporting a country that is under US sanctions. And the political rumblings are growing louder.
A new political campaign has gathered mass support via social media: the #ThisFlag hashtag was launched by Pastor Evan Mawarire to protest against corruption, police brutality and poverty, after Mawarire and allies coordinated widely backed stay-away protests on 5-6 July. The National Prosecuting Agency charged him with 'subverting a constitutional government' which carries a sentence of up to 20 years.
Mawarire was allowed out on remand after a hearing last week and has since travelled to South Africa. He still posts videos on social media calling for non-violent protests. Certainly, he has riled the ruling party. During his eulogy to Charles Utete, the pioneering Secretary to the Cabinet who was buried at Heroes' Acre on 19 July, Mugabe hit out at Mawarire: 'Beware these men of the cloth, not all of them are true preachers of the Bible… I don't know if they are serving God.'
More than the mild-mannered Mawarire, the growing frustrations of young people on the margins unsettle the government. Although few heeded Mawarire's second call for a mass stay away, thousands turned up for his court hearing to show solidarity. Now opposition parties are taking a common position on a transitional government to reform and stabilise the country ahead of the 2018 elections. Leading the charge is Tendai Biti, former Finance Minister and now leader of the People's Democratic Party, a breakaway from Morgan Tsvangirai's Movement for Democratic Change. Biti wants a coordinated programme to reform the macro-economy, constitution, security forces, justice system and to put a 'full stop' to the land and compensation issues, restoring the land market after an audit and giving a tradable title to smallholders and bigger farmers.
It was Biti who warned in March that companies in the Marange diamond fields had diverted as much as $14 bn.; a figure later repeated by Mugabe when he explained why the government was restructuring the industry.
Such a transitional government, dominated by technocrats, would have to slash the public sector wage bill, said Biti. There were 232,000 civil servants at national and provincial level when he became finance minister in 2008 but that had risen under ZANU-PF rule to over 530,000 by 2013.
Similar demands are being made by Tsvangirai and Joice Mujuru, the ousted Vice-President whose People First party has won significant support from ruling party dissidents (AC Vol 57 No 3, Mujuru goes for glory). The question is whether the myriad opposition groups can coalesce to push their programme.
Formally, the government rejects the idea point blank but some insiders concede that they are running out of options with no better economic news on the horizon. Some quietly hope that bringing in non-political technocrats could speed negotiations with the creditors and access to new funding. On that possibility, there is a deafening silence from the IMF, World Bank and Western embassies in Harare.
A fistful of dollars
As the country's cash crisis deepens, doubts are growing about a plan to issue US$200 million of bond notes, described by President Robert Mugabe as a 'surrogate currency'. Backed by a credit line from the African Export-Import Bank, the bond notes were to be issued to exporters to pay for their foreign exchange requirements. Companies that joined the scheme would also receive a 5% bonus as an incentive to boost export sales of gold and tobacco in particular.
In theory, the bond note plan would boost cash reserves and encourage those companies with dollars to keep them in the domestic banking system. But instead of boosting confidence, the bond note has created a new panic.
Companies are struggling to find US dollars to keep their operations ticking over (AC Vol 57 No 7, Dollar curbs anger bigwigs). They want guaranteed access to US dollars in case the rules change. Already there is a 10% premium for United States dollars held in cash as opposed to bank accounts.
Initially, the economy stabilised after the government's decision in 2009 to abandon the Zimbabwe dollar, rendered worthless by 500 billion % inflation, and to introduce the US dollar and South African rand as the leading denominations in a multi-currency system (AC 50 Vol No 8, Good-bye to Zimbabwe's dollar).
At the root of the problem are widening current account and budget deficits. The market prices for many of Zimbabwe's imports such as tobacco, nickel and platinum have fallen while the US dollar has appreciated, further tightening the financial squeeze. A Reserve Bank of Zimbabwe official said that a country in Zimbabwe's position should ordinarily devalue it's currency by 20%, but because Zimbabwe has no power over the US dollar, its only recourse is to tighten import controls and strictly ration foreign exchange. The government was going to issue the bond notes in June but is delaying them until October after widespread criticism. Some say the bond note announcement, made before wide consultation, triggered higher demand for US dollars and worsened the cash crisis.
Banking sources in Harare said Afreximbank had extended a US$200 mn. facility to Zimbabwe to fund its banks' nostro accounts -that a bank holds in foreign currency in another bank -'to support exporters with import orders'. Now these nostro accounts have been depleted due to tougher rules by the central bank and the mounting trade deficit. This $200 mn. is now being earmarked for the bond notes.
The central bank has a priority list for foreign exchange payments; many companies report long delays in the transfer of funds via the central bank to offshore suppliers even though they have financed the payments from their own local US dollar accounts. Their suspicion is the government is delaying as many payments as possible to ease its chronic cash shortage.
Opposition politicians are rallying people against the bond notes accusing Mugabe's government of trying to reissue the Zimbabwe dollar through the back door. Former Prime Minister Morgan Tsvangirai has said civil servants would be paid in bond notes if they allowed government to introduce the currency (AC Vol 57 No 9, Morgan goes it alone).
Tsvangirai says he would back protest against the notes. The Joint Operations Command, which coordinates state security, is understood to see the cash crisis and opposition to bond notes as a potential political flashpoint. Home Affairs Minister Ignatius Chombo has warned that Tsvangirai and his Movement for Democratic Change would 'have themselves to blame' if the demonstrations got out of control. 'I have never seen a political party which protests against money,' added Chombo.
Copyright © Africa Confidential 2021