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What are the prospects for Zimbabwe's turnaround?
Zachary Ochieng, Business Daily Africa
September 03, 2008

http://www.bdafrica.com/index.php?option=com_content&task=view&id=9766&Itemid=5848

Necessity is the mother of invention. And the crisis in Zimbabwe has sent experts scratching their heads for a solution. Observers believe that the Zimbabwean economy can be salvaged through efforts to reform the country-s political corruption and irresponsible monetary policies.

Against this background, a group of experts last week held a roundtable discussion at the United States Institute of Peace (USIP) in Washington and came up with a report titled Depoliticizing Zimbabwe-s Economy: Solutions for Two Million Per cent.

Raymond Gilpin, Director of USIP-s Sustainable Economies moderated a panel of experts comprising Callisto Madavo, visiting professor at the African Studies Programme at Georgetown University. Keith Campbell, managing director at the Executive Research Associates; Bernard Harborne, Lead Conflict Specialist at the World Bank and Frank Young, Vice President of Economic Policy Research think tank, Abt Associates.

The report says Zimbabwe-s deep-seated economic malaise has robbed citizens of their savings, rendered incomes practically worthless and undermined domestic productivity.

It adds that soaring inflation and currency depreciation have been the most visible manifestations of Zimbabwe-s economic woes during the first half of 2008. By mid-July, estimates of annual price increases exceeded a mind-boggling 2,000,000 per cent, while the domestic currency lost practically all its value every time it changed hands. According to some estimates, the Zimbabwean dollar (ZIM$) depreciated three-fold in June 2008.

Three main factors have accounted for this precipitous decline in the country-s economic fortunes. The first is bad economic governance perpetrated by President Robert Mugabe and his team. Excessive government spending and a series of wrong policy choices, such as price controls and fixed exchange rates, have crippled the productive sectors.

Chronic fiscal indiscipline is the second. Rather than take steps to correct policy failures and institutional weaknesses, the Mugabe regime ran substantial ongoing budget deficits.

They deficits were primarily financed by Zimbabwe-s central bank, which injected money at extraordinary rates. Third, the failure to uphold the rule of law created chaos and uncertainty, which eroded business confidence, led to the misallocation of resources and depressed economic output. This has been particularly worrying in relation to corruption and land ownership.

In addition to creating a litany of economic woes, these factors have also stymied prospects for peace. Bad governance has fostered a culture of impunity and helped reinforce the political and economic muscle of the regime-s leadership.

This group has become deeply vested in the status quo. They have demonstrated a capacity to do whatever it takes to maintain their privileged positions, which guarantee unfettered access to wealth and power—at the expense of the vast majority of Zimbabweans. At the household level, severe and deepening deprivation contributes to a sense of helplessness and frustration.

Failure to resolve Zimbabwe-s political and economic problems could exacerbate horizontal tensions (as groups compete for dwindling resources) and vertical tensions (as individuals and groups try to change the system of governance).

In March, the Zimbabwean currency tumbled to a record 25 million dollars for a single US dollar.

According to Madavo, the deliberate mismanagement of Zimbabwe-s economy by the Mugabe regime shows that they "care more about themselves than about their people." The economic policies they adopted deepened poverty and made doing business in the formal sector prohibitively costly.

For example, while the mismanaged exchange rate and staggering inflation make the earnings and savings of Zimbabweans worthless, the government insulates itself by conducting transactions at an overvalued "official" exchange rate.

"The government ignored the implications of this policy (such as foreign currency shortages and an increasing parallel market premium) and sought to mitigate its effects by introducing price controls and imposing limits on daily bank withdrawals", Madavo says.

Politics and economics are very closely intertwined in Zimbabwe. The Mugabe regime views both the finance ministry and the central bank as its money machines.

Continued government intervention in credit allocation, resource distribution and trade has progressively weakened the economy and its institutions. This is why Campbell believes that "Zimbabwe-s economy won-t get fixed until politics gets fixed."

Harborne reiterated the importance of "a political breakthrough" and outlined steps that could be taken to encourage meaningful economic reform in Zimbabwe.

These include designing a clearance mechanism to address the massive debt amassed by the Mugabe regime, developing a comprehensive strategy and mobilizing external resources to help finance reform and provide social safety nets. Zimbabwe-s external debt was estimated at $4.8 billion in 2007, while domestic debt rose from ZIM$346 billion in December 2002 to ZIM$1.4 trillion in June 2005.

International strategies and domestic commitment to reduce this burden are critical for adequate investment flows and buoyant private sector-led growth to resume.

A comprehensive strategy should guide efforts to mobilize and utilize external financial support. Harborne talked about the importance of coordinating international assistance in order to ensure aid effectiveness and maximize development impact.

The country-s exchange rate policies should also be revised. The effects of the failed fixed system have been felt across the economy and it will take some time to restore confidence. During this period, the Zimbabwean currency could be pegged to a convertible currency (or basket of currencies). The ultimate goal would be to effectively unify the official and parallel market exchange rates and ensure some predictability in the foreign exchange market.

At the same time, steps should be taken to re-establish the rule of law, remove punitive trade controls, encourage private sector development and institute public expenditure management reform.

Ultimately, the report says, rebuilding Zimbabwe-s economy will require concerted effort from a wide range of stakeholders, especially Zimbabweans. True country ownership and broad-based participation are critical.

Appropriate Zimbabwean individuals and institutions must assume leadership of this process because any strategy must fully reflect the country-s changing economic relationships and address current and emerging challenges.

A political solution that wrests control of Zimbabwe-s economy from Mugabe and his regime is a precondition for sustainable economic reform. In addition to correcting the failed policies of the past, this would also dismantle Mugabe-s collectively reinforcing network that has monopolized access to government subsidies, contracts, public institutions and finance.

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