ZIMBABWE CONTINUES TO ACT AS A CAUTIONARY TALE

Last week it was announced that Zimbabwe’s finance ministry was mulling the possibility of a gold standard to shore up its hopeless currency.

Zimbabwe dollar battered by hyperinflation and falling export receipts has become so worthless that Zimbabweans have forsaken it for the South African Rand, US dollar among other hard currencies to transact in their daily lives.

A gold standard would hold the government to a discipline of only issuing as much currency as they have gold reserves (As was suggested in this column in 2008).

"This would have the immediate effect of putting the brakes on inflation and strengthening the currency, but would in the short term be very painful for the man of the street as cash would be in short supply and hard to come by...

How did it come to this? Zimbabwe used to be the breadbasket of Southern Africa, an emerging economy with industries and a growing middle class, better than adequate infrastructure – physical and social and generally an African country on the move.

What happened? In a nutshell, bad politics.

Former president Robert Mugabe and his ZANU-PF under pressure politically, resorted to populism, redistributing land arbitrarily to their cronies and gutting the southern Africa nation’s productive sector with one fell sweep.

It bought them an election but in the process setting the promising economy back decades. According to some reports the country’s per capita GDP has regressed to its 1980 levels, meaning they have fallen out of the middle income status as a nation.

That’s just a number, but for the everyday Zimbabwean it means shortages of essential commodities – Zimbabweans returning home stock up on sugar, bread and cooking oil; it means fuel lines at the stations or walking long distances to work, out of necessity because they cannot afford fuel or transport; it means a real fear of hunger and starvation.

"Zimbabwe is an important case study for us, in the developing world where politicians think they can tamper with the economy to sustain themselves in power, without regard to the long term repercussions to the general population...

Because the truth is, even in Zimbabwe the ruling class are not suffering the hardship and shortages of the everyday man. They still ride to work in fuel guzzling four-wheel drives, take their children to study abroad and have their families treated overseas—Mugabe died thousands of kilometers away in a Singapore hospital.

In Uganda we are no strangers to this downward economic spiral. While it did not start with the expulsion of the Asians in 1972, this clearly speeded it along by decimating our commercial class, a blow we have barely recovered from now 50 years later.

To get the economy back on an even keel, we have had to do some unpopular things like liberalise the economy, which while growing the country’s wealth has concentrated it in a few hands. This last part thanks largely to government inefficiencies and corruption.

While the Uganda macroeconomic stability and growth must continue in Uganda, probably more importantly the economy has to be rejigged to give every Ugandan a fair shake.

This does not mean government standing at every corner dishing out shillings. As popular as that may be in the short term it only serves to create dependency on government instead of self-reliance of the population.

The distribution would take the form of improving social service as a way to improve our human capacity, widespread infrastructure to allow access to market for our producers and improved safety of person of property, through improved security and application of the law.

That it is why it is important to pay attention to corruption whether in government or the opposition, because the perpetrators will seek to protect the status quo even if and especially if, it does not advance the living standards of the everyday man.

This is why given all that we have seen in recent weeks, with opposition politicians just as, if not more, rapacious than the usual suspects, calls for government to own businesses should be avoided like the plague. In fact we should look closely at the champions of these calls because more likely than not they would be the main beneficiaries of the increased surface area for corruption.

The point is this, just as in Zimbabwe, we need to recognize the productive sectors of our economies and rather than disrupt them, because we have no real control over them or because we want some quick political fix, enable them to be more productive through macroeconomic stability and an improved business environment.

Given our economic history, one would think I am preaching to the converted, but the political drama since the beginning of the year suggest that we are leaving the door open for some dangerous political maneuvering that may very well send us back into an economic abyss most of us have no knowledge of. Eight in ten Ugandans were born after 1990.

If Zimbabwe which had already attained middle income status in the 1980s, can be spiraling out of control, let us not think we are immune to the same, whatever the fat cats in government want us to believe.

ZIMBABWE, THE LESSON THAT KEEPS GIVING

Last week it was reported that 20 years after they were sent fleeing from their farms by war veterans, white Zimbabweans are returning to work the fields.

The once productive farms, even the ones taken over by former president Robert Mugabe's clan, have seen production collapse and in many instances stopped altogether.

Good sense has overridden bad politics. It helps of course that former president Robert Mugabe ego is not in the way or more importantly the political imperative that led to that economic suicide does not obtain.

First off a bit of background. When the English colonised Zimbabwe they carved off the best land for themselves and relegated the African to the marginalised land...

The white farmer proved so successful that Zimbabwe became the breadbasket of the south, building a strong agricultural sector to complement their mineral resource endowment.

No doubt an injustice was done. An attempt to redress this in an orderly fashion with the return to black majority rule in 1980 was squandered by Mugabe and his cronies. In 2000, facing mounting opposition and an imploding economy, Mugabe let war veterans loose on white farmers, occupying their land without compensation as the state looked on.

This was wrong on many fronts but two stand out for me.

This was a blatant attack on the property rights not only of the white farmers but by extension all Zimbabweans.  This is critical because if property rights are brought into question the willingness to invest in the country suffers. Who wants to build a house, open a shop or start any business when they are not sure if tomorrow the government, which sworn to protect life and property, will go beyond coveting to taking over their business?

Secondly, hate them or love them, the white farmer was the backbone of the agricultural sector, which not only fed the population but provided significant hard currency, in support of an economy we envied for its good infrastructure, quality health and education services.

The inevitable happened. The economy went into a tailspin and Zimbabwe is not even a shadow of the shadow of its former self.

"In Uganda we are no strangers to this suicidal political thinking. Idi Amin on a whim, chased the Asians, our dominant commercial class, to win cheap and dubious political points and with no thought to how the gap would be bridged. Its no surprise that 50 years later, hungover from that trauma, Ugandans cannot save long term and as a consequence have few long term investments to mention.

As a result, we lost almost 30 years of economic progress – we only recovered to our 1970 level around 2000.

The thing about history is that those who don’t pay attention to it are bound to repeat the same errors.

Zimbabwe is in a desperate situation that calls for desperate solutions. They have just come out of an election which saw Emerson Mnagagwa re-elected. Inflation was last reported at 176 percent, an official figure that understates the problem and a currency that is not worth the paper its printed on.

Its hard to see how southern African economy can be turned around under a truly democratic dispensation.

Again, we have been there. Harare will have to cut down public expenditure, especially unsustainable subsidies, sell off hemorrhaging public enterprises, break up inefficient monopolies and liberalise the economy...

This will on one hand, liberate the individual initiative of Zimbabweans and attract new investment, while at the same time leading to massive job losses and further economic strain.

Unlike Uganda where our food supply comes from small holder farmers, who whether hell or highwater, will always produce food, the Zimbabweans don’t have that buffer and therefore economic reform will be that much more painful.

All this will be politically costly for any government to attempt. For the last two decades faced with this reality Harare has been reluctant or unwilling to make the hard decisions to turn the economy around, because of this.

The use of anything but the Zimbabwe dollar as a currency, makes drastic economic reform all the more urgent. What it means is that Zimbabwe has little room to manoeuvre when its money supply controlled by Washington or Pretoria. Zimbabwe’s priorities are not necessarily those of the US or South Africa.

A situation not unlike the former French colonies of western and central Africa whose budget is controlled by Paris, has led to intergenerational poverty and has served as the trigger for recent coups.

Zimbabweans are a nice people and they do not deserve this. No one does.

The lesson of course is that bad politics, with no reference to the people, leads to poor economics which in turn leads to bad politics. A vicious cycle that needs strong leadership to break out of. Whether Mnagagwa and the ZANU-PF are up to the task, only time will tell.

THE MORE THINGS CHANGE THE MORE THINGS REMAIN THE SAME?

In 1979 I remember along the Kampala-Jinja highway the few fuel stations – they cannot have been more than five, had no fuel. But every so often you would come upon a jerrycan by the roadside, often plugged by a finger of matooke, and filled with a liquid either red but more often green.

If you needed fuel you stopped at the jerrycan and someone would emerge from the surrounding plantation or a nearby hut and you would negotiate. You were often so relieved to see fuel, because by this time your fuel gauge would be flashing red, its quality was the last thing on your mind.

I couldn’t help remembering this state of affairs from more than 40 years ago, in the light of the fuel “crisis” we suffered in the last week.

Truckers in protest over Uganda’s insistence they do a covid test before entering the country, had piled up at the border causing a fuel shortage.

Prices hit record highs with reports of petrol in western Uganda going for sh12,000 a liter!

"What we have known for a long time now, is that Uganda’s pain threshold is considerably lower than 1979. A few stations out of fuel and it’s a full blown crisis. Which is how it should be. When progress or development happens, what are counted as bare essentials rises...

In 1979 no petrol in the stations, no sugar, no soda was acceptable, try that now and see.

However, some of the solutions offered by politicians and the public also show that what we learn from history is that we don’t learn from history.

The suggestion by some sections that government should control the price of fuel, was one of those. Thankfully government was not entertaining the suggestion because it would cause more harm than good.

For starters it would aggravate an already bad situation, increase the shortages and push the prices higher as a parallel or black market in petrol emerges, a return to the days of the lonely jerrycan on the roadside.

It’s a simple supply and demand logic, when supplies fall, demand rises and prices will follow suit. This is not a manmade law, it’s a natural law and you can only subvert it temporarily and at great cost to yourself or in this case to the economy.

The law of gravity will work whether you like it or not. But for brief periods aeroplanes, for example, beat the law but at what cost?

A Boeing 737 weights about 70,000 kgs or 70 tons while fully laden. To keep it in flight costs 3400 liters of fuel per hour. A truck hauling the same amount of cargo would not consume 50 liters per hour.

The same goes with the laws of supply and demand.

"Politicians can huff and puff all they want but as long as there is an imbalance between supply and demand price will go where it will...

.

So while it looks like common sense for government to dictate price, traders will look at the cost of bringing the fuel to market compare it with government price. If it makes sense, meaning government price is higher than cost the traders may supply but as soon as it shifts the traders will turn off the taps or find a way to get their product onto the black market and the price goes up anyway.

Reminds me of when government liberalisd the foreign exchange market by allowing forex bureaux. The naysayers warned that even the little forex we had would be sucked out of the economy. But the opposite happened, more forex flowed in, the exchange rate found its level and the black market disappeared.

So what to do about the fuel crisis, using the laws of supply and demand?

Thankfully with agreement reached with the truckers,  supplies will be restored and prices will revert to the normal.

That being said a discussion around beefing up our national reserves would be something parliament may interest itself in. As it stands I hear we have fuel reserves, both public and private, to last us 10 days and this figure is falling every day as our fuel demands increases.

An investment in increasing our reserve capacity beyond ten days supply – The US petroleum reserves can last them a month at least, would come in handy. The cost of storage is the price we will pay for trying to rebalance the supply-demand equation when it goes awry.

Calls to dictate fuel prices or any prices for that matter, are a knee jerk reaction that may be good for the headlines but are bad economics that will invariably lead to a worsened political situation – ask Zimbabwe and should not be entertained by reasonable thinking members of society.

 

 

THERE IS NO MONEY TOO MUCH TO FINISH

From Zimbabwe last week, came the news that former President Robert Mugabe’s vast wealth, accumulated over 37 years of rule, was dwindling and dwindling fast.

Choice assets – dairy farms, mines and real estate, are falling into disrepair, their assets auctioned off to pay debts or been encroached on by squatters.

The story in the African Report entitled "Mugabe’s business empire, the death of a dynasty” was a bit extravagant (this was not dynastic wealth), but painted a dire picture.

People don’t believe it, but

there is no money too much to finish...

At the height of his power Mugabe was reported to have properties worth hundreds of millions of dollars in Zimbabwe alone and frequently flew abroad with his histrionic wife, Grace on shopping junkets, while his administration had reduced Zimbabwe from the food basket of the region to the economic basket case it is today.

Us mere mortals labour under the illusion that when money has been accumulated it does not go anywhere. That once we are rich we will always be rich.

A cursory study of history shows that this is not so.

A friend of mine is continuously baffled at “corrupt” officials who do not seem able to reach a point in their thieving ways and say enough. My attempts to explain to him that the only way they can sustain the loot is by stealing more and more, falls on deaf ears.

I have already shared with him the Mugabe story.

"Money is made and wealth is built by delivering value to society, the more people you can deliver value to the richer you can become....

From an employment perspective you would rather be working for a company that is delivering value to millions of customers than one that is delivering value to thousands. The former company if run efficiently should pay better than the smaller company.

From a business perspective you want to be fishing in the biggest pond possible. Small markets will only take you so far in terms of accumulating wealth.

That’s why Mukwano went into bar soap manufacture or Mulwana manufactured plastic plates, mugs and basins or why Sekalala went into chicken and the list goes on – all of whom except Sekalala would struggle in Europe or the US selling what they do here.

So once you have found your market the trick is to exploit it efficiently – earn more than you spend to deliver the product or service to market. In a competitive market people are not obligated to buy your product unless they recognise its value in their lives.

Compare this to the corruption “business model”. This model dictates that you reap where you did not sow.

"The major investment you make is the suspension or elimination of any qualms you may have towards stealing funds....

under your charge. Another investment would be enrolling in the network of like minded individuals.

Because there is no cost of money, so to speak, you can then indulge your insecurities by showing off that you have arrived, safe in the knowledge that there is more money where the money you got came from. 

The problem is that this model is not sustainable because  resources are not infinite and also because the network of like minded thieves will grow with time and you will have to feed them by stealing more and more. This will eventually catch up with the thief, either because they end up eating the goose that lays the golden eggs or they knowingly or unknowingly get on the wrong side of some one who can do real damage to the “eating” network.

Once the thief is kicked out of the network, as always happens, if they don’t die first, they quickly realise they can not operate in the real world where money has a cost and to make it grow and sustain the lifestyle they had become accustomed, to they need to apply themselves beyond dipping their grubby fingers in the till.

So what happens next, they find a way to get back in the “eating” network by whatever means necessary – at this point they will lap up their own vomit if need be. And if they can not get back in, they fight the network from the outside, but always ready to do an about turn at a moment’s notice if the “network”  changes its mind about him.

For the “network” to remain happy the economy they operate in, be it a country or a company needs to keep growing. This is critical because if it starts stuttering the “eating network” will not cut back on their eating, in fact they even pump it up further. 

"When you continue to milk the cow without feeding it the end is inevitable....

Mugabe is a classic case of how a country can be brought to its knees because the “eating network” has to be fed. It got so bad that they started preying on the productive sectors – commercial farmers, to sate their rapaciousness.

They become like the Ebola virus, killing its host regardless  of if it needs the host to stay alive.

What if Mugabe had negotiated with the owners of capital, got them to concede not too much that they do not kill their productive capacity but enough that his government would be able to spread the wealth around by providing public goods that would improve his people’s living standards? 

It would take longer – maybe decades to see real change, compared to the immediate gratification of grabbing a viable commercial farm by the network.

But that is not how the “eating network” operates.

MORE EVIDENCE THAT CENTRAL BANKS NEED TO BE INSULATED FROM POLITICS

Recently Zambian President Edgar Chungwa Lungu sacked the govenor of the Zambian central bank  Denny Kalyalya ostensibly because he refused to turning on the money printing presses.

With economic growth in reverse, inflation  threaten to gallop out of control and an election coming last year Lungu’s need for cash.

He has brought in a more pliable central bank boss Christopher Mvunga and is now probably more confident of retaining his seat in the next polls.

His actions are more surprising given the experience of neighbour Zimbabwe, a once proud economy that is now scrambling, with little success, to get off its knees.

Former President Robert Mugabe in a bid to hung on to power gutted the country’s productive sectors and resorted to printing money at a whim. The net effect has been, among other things, that Zimbabwe, the once food basket of the region, now needs food aid to feed its people and has gained notoriety,  a few years ago for experiencing hyper inflation the like of which had never been seen anywhere before.

Now Lungu is threatening to do the same.

Central banks’ major role is to aid price stability. When prices fluctuate wildly it is difficult for producers to plan or save which tends to discourage investment and hence development.

Politicians are all about getting into power and staying there once they have attained it. Unfortunately, left to their own devices they will do this by whatever means necessary.

Your politician, unrestrained by strong institutions or traditions would rather sink the economy if that will serve to keep them in power longer.

In the politicians’ mind their own survival now is more important than the long term sustainability of their countries.

We have seen it before.

"Politicians when it suits them put their heads in the sand and pretend as if the laws of economics, demand and supply can be suspended or expunged altogether in the service of their political ambitions....

Former President Hugo Chavez, whose country Venezuela has the largest known oil reserves of any country, thought he could be play the market.

When oil hit record levels -- $100+ a barrel a decade or so ago, he thought this was a permanent situation expanding government, poisoning the environment for business and set himself as a year around Father Christmas.

However, oil prices collapsed to below $30 a barrel constraining his ability to be everybody’s favourite uncle. The economy then went into a tailspin to a point that people are bathing in the streets, seeing as piped water is gone and diseases like Malaria, eradicated decades ago are back with a vengeance.

Norway went the complete opposite, socking away billions of dollars in oil revenues in their sovereign fund. They beat back the populists who called for a higher amount to be drawn from the fund – they restricted themselves to withdrawing not more than 4% of the national budget. As a result they have more than enough surplus to see them ride much easier than others during this Corona crisis.

Critics of disciplined economics say that the laws of economics are not the natural order and are conspiracy perpetuated by the Bretton Woods institutions, intended to shackle the lesser developed economies.

They often cloak these arguments in a nationalism, diverting blame from themselves onto foreigners.

"They say nationalism is the last resort of the scoundrel. But even nationalism is no match for the realities of supply and demand...

And that is why public enterprises fail all over the world and even when they function they do not do that optimally. Those handful that thrive are the exception that justify the rule.

One does not have to be a prophet to see that Lungu is leading his country down a dangerous path. The resulting low growth, hyper inflation and increased poverty will call for very unpopular policies – cuts in public spending, privatisation and liberalisation of the economy, which will then be blamed on the World Bank and International Monetary Fund (IMF).

Running a disciplined economy means one can not have all he wants, a country will be forced to cut its coat according to its cloth. If discipline is maintained economic growth can follow and a general improvement in living standards of the population.

Populist economic measure may cause the good times to roll, but only for a short while, before all hell breaks loose.

"Mugabe run the white farmers and industrialists out of town and distributed the land to his supporters. Their was rejoicing for a while as well as kudos from armchair revolutionaries on the continent. This has since turned to wailing and gnashing of teeth by the everyday Zimbabwean and a deafening silence from his cheering section on the continent....

Such advice will likely fall of deaf ears, Lungu’s political ambition will not be denied.

SPARE A THOUGHT FOR ZIMBABWE

Winston Churchill once intoned “When you are going through hell, keep going.” If you think about it, you really have no choice. Or maybe you can lie down and die.

Well Zimbabwe and its people, don’t have a choice but to keep going through the hell they are in.

At the end of last year it was reported that 60 percent of Zimbabweans do not have adequate food. 

"People are missing meals not out of some adherence to the latest fad. Drought had caused crop failure. The prices of bread and maize, staples of the Zimbabwean diet, had gone up by as much twenty times in the last half of 2019.

As if that was not enough, aggravating the already dire situation, there is a shortage of foreign currency, inflation is back up in triple digits, fuel shortages persist and livestock losses are apocalyptic.

The total collapse of the economy, on the late Robert Mugabe’s watch over the last two decades, means the country doesn’t even have its own currency. The US dollar, South African Rand and hodge podge of other hard currencies are used as everyday mediums of exchange.

This is ironic because the southern Africa’s agriculture and mineral industries are in intensive care and there is not enough hard currency to go around.

The implications for the everyday man is as described above. The government has no control of its monetary policy and they are letting people die of hunger, because they cannot muster a disaster relief effort.

In Uganda if we had a drought on the scale that Zimbabwe is now facing, in the worst scenario we can print shillings to buy relief food. The inflation we can fight later. Zimbabwe doesn’t have that luxury.

"This story is even more tragic when you remember that Zimbabwe was the bread basket of the region. With their agriculture industry deep as it was wide, with a huge commercial production and vibrant agro-processing sectors, its incomprehensible that Zimbabwe finds itself where it is now...

They got to this point because Mugabe, facing growing opposition to his rule, pointed at the while commercial sector and turned on them, as a way to win cheap political marks. In the process he gutted the pillars of the country’s economy.

It is true that the colonialist dispossessed the native Zimbabweans of their land—it was estimated that the white farmers, who made up less than a tenth of the population, controlled more than two thirds the arable land at the height of their power.

No one can argue against the historical injustices meted upon the Zimbabweans by the colonialists and white minority government up to 1980.

However, a visionary leader would have assessed the situation and worked out that to redress those injustices, they would have to leverage the productive capacity built over decades to uplift his people. 

Done effectively and efficiently, the ordinary Zimbabwean would have seen a quick enough improvement in his standard of living. Eventually a shift of capital would even things out between the races.

The populist thing of course, would be to drive the white settlers into the sea, or at least over the border – Zimbabwe is landlocked, and divide the spoils among the frothing-at-the-mouth masses. 

There would be a temporary excitement as the locals gouged themselves on their erstwhile oppressors’ wine collections, choice livestock and prance around in their finest gowns.

The reality would catch up soon enough, when they cleared out the stock and couldn’t replenish it. As happened in Zimbabwe, and Uganda before that, in a manner of speaking.

"Mugabe was spared by death. Spared from seeing how deep Zimbabweans are going to have to sink before it gets better....

We know the formula. We have experienced it first hand in Uganda.

To begin with government is going to have to go bowl in hand to foreign capitals to beg for money to feed its people. Then they are going to try and resuscitate the abandoned industries, to try and generate some economic activity. They will fail and flog them off or return them to their rightful owners. They are going to do this in context of an austerity program – minimal spending on social services. This is necessary to bring inflation under control. In order to further accelerate economic growth, they are going to have to fling open the doors to the economy, bend over backwards to attract foreign investment. Because they do not have the internal capacity to do it themselves.

There will be much gnashing of teeth and renting of cloth in the hills and plains of Zimbabwe, before the light at the end of the tunnel comes into view.

Meanwhile there will be populists and demagogues inside and outside Zimbabwe criticizing the drastic measures the government will be forced to carry out, to get the country back on track. These dissenters will propose alternative, more benign policies, that look good on paper but have no practical chance of success.

It is impossible to see how this turnaround can be achieved in the context of democracy. It didn’t happen in post World War I Germany nor post world war II Japan or South Korea.

"For Zimbabwe to pull itself up by the bootstraps, there will have to be a singleness of purpose, an unbendable resolve and immeasurable sacrifice, all of which would be hard to marshall in a liberal setting...

While we spare a prayer for Zimbabwe, let us not delude ourselves that a like implosion, cannot visited upon us if we subvert the laws of economics for political expediency.