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Doomsday predictions premature?
Institute for War and Peace Reporting (IWPR)
Florence Ushe (AR No. 118, 21-June-07)
June 21, 2007

http://iwpr.net/?p=acr&s=f&o=336492&apc_state=henh

International aid agencies based in Zimbabwe are predicting that the country's economy will implode within the next six months, potentially leading to major social unrest.

But economists interviewed by IWPR disagree, saying total meltdown is not imminent, and crediting Zimbabwe's informal sector with keeping disaster at bay when under normal circumstances everything should have ground to a halt a long time ago.

The Heads of Agencies Contact Group, which represents close to 40 aid groups and other non-government organisations, including the United Nations, the Red Cross and Oxfam, have warned that the country's economy will completely cease to function by December this year.

The Heads of Agencies report, issued last week and compiled by private consultants to raise awareness among international organisations, donors and their staff in Zimbabwe, said aid groups should brace themselves for a scenario where shops and businesses closed, the Zimbabwean currency became utterly worthless; unrest broke out among a destitute population; and a state of emergency was declared by the government.

The key trigger for disintegration, according to the report's authors, is an acceleration in the already headlong gallop of retail price rises - the world's highest rate of inflation.

In May, inflation stood at 4,500 per cent compared with the same month in 2006.

Year-on-year inflation has been in the thousands for some time, but what worries the consultants who wrote the report is the speeding up of price rises from month to month. By the end of May, prices were 100 per cent higher than they had been at the end of April, so that as the report put it, wages and money held in the bank halved in value in the space of four weeks.

This monthly jump has accelerated the trend for shops to constantly change price-tags on the goods they are selling. As well as doubling prices over the course of May, the report said retailers were doubling them again in anticipation of the need to restock at much higher prices.

Indications that money was quickly becoming worthless were that price quotations were now being quoted as valid for a day - even an hour - instead of seven to 14 days; wages were being paid weekly instead of monthly, and sometimes in kind rather than in cash; and the rate of business closures was higher than in previous months.

If this trend continued, "doubling the current [month-on-month] inflation for each of the seven remaining months of 2007 gives 512,000 per cent [year-on-year inflation], thus the economic collapse is expected before the end of 2007", the report's authors said.

The Zimbabwean dollar is already depreciating fast in real terms, and the government policy of pegging the official exchange rate at 250 to the dollar has only created a burgeoning black market in scarce foreign currency. But if inflation continues to rise at present rates, the report says the national currency will go out of use altogether, to be replaced by a mix of barter and payment in foreign currency.

When that point comes, the forecast is gloomy - "shops and services substantially cease to function", unemployment becomes near universal, and there is "concomitantly increased crime and possible civil disturbances", according to the report.

Many people think the economy has pretty much fallen apart already. Most members of this once relatively prosperous nation are close to destitution. Power and water utilities are slowing to a halt, with long daily cuts experienced across the country. Telecommunications are poor and the already faltering education system has deteriorated further.

The health sector, according to the Zimbabwe Association of Doctors for Human Rights, has already ground to a halt following a recent strike by staff at the country's major health institutions. Public hospitals have closed their doors to the public and have been emptying their wards.

Yet some local economists argue that while the economy is "deeply stressed", it is unlikely to collapse in the next six months - because it is being saved by the relatively vibrant "informal sector". This term means small businesses, traders, and craftsmen and women, and service providers who operate outside the reach of the taxman and whose activities are not captured in national statistics.

Economists polled by IWPR said Zimbabwe has defied all conventional economic and political theories, so that predicting the imminent demise of its economy is risky.

Under normal circumstances, no country that was not actually at war would have survived such high inflation rates and parallel exchange rates 100 or more times the official rate.

"My understanding is that [the economy] hasn't collapsed because of the people who are the bottom of the pyramid; that is, the informal sector," said Crispen Mawadza, whose company finances small- to medium-sized businesses.

Zimbabweans were naturally endowed with entrepreneurial skills, he said. Had this not been the case, many more children would have had to drop out of school, and industries would have gone under.

Economist David Mupamhadzi concurred with this view, saying it was misleading to posit economic meltdown on inflation indicators alone. Before this happened, other key economic variables would need to have deteriorated to unmanageable levels, including unemployment and social indicators such as the functioning of healthcare.

"It will not happen in Zimbabwe - not in six months," predicted Mupamhadzi. "It is a fact that our economy is overheated and most of the key indicators are in the negative - the economy is in dire stress.

"However, if you look at Zimbabwe's economy, what is carrying it is the informal sector. The informal sector is driving Zimbabwe's economy as it tends to cushion people [from their hardships]. If the economy was totally formal, it would have totally collapsed a long time ago."

He concluded, "Zimbabwe's economy has defied all conventional logic."

Another local economist, John Robertson, said it was not easy to define exactly when a country could be said to have collapsed.

"Total collapse does not actually happen. People are making comparisons of countries like they are talking about companies. A country never ceases to exist. A collapse happens when the current system of governance breaks down completely.

"What I can say about Zimbabwe is that there is a state of collapse of certain systems like traffic lights, water, telephones, power and health. There can be total collapse when people lose confidence in the use of their own currency - when workers say they want to be paid in foreign currency and shops demand foreign exchange for purchases."

Another prerequisite for this would, he said, be that the large public sector - civil servants and the military - said would have to say they could no longer subsist on payments in Zimbabwean dollars. This would trigger a loss of confidence and the breakdown of financial systems like banks.

Another factor, not mentioned by these economists, is the safety net provided by the substantial remittances that Zimbabweans receive from relatives abroad.

Comprehensive data are difficult to come by, but a study by the Global Poverty Research Group last year showed that of 300 households surveyed in Harare and Bulawayo, half had received cash, goods or food from abroad, almost all within the last year.

This represented "an extraordinarily high density of receipt", the report said, concluding that it reflected the reality that migratory flows had become "key coping strategies" in recent years.

The two main locations for relatives were Britain and South Africa, with Botswana and other countries some way behind.

Florence Ushe is the pseudonym used by a journalist in Zimbabwe.

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