The Current State of Zimbabwe's Economy October 29 2016

Analyzing the Current State of Zimbabwe’s Economy

Amid the turmoil of the Global Recession, the African nation of Zimbabwe experienced massive economic growth under the guidance of a coalition government. Between 2009 and 2011 the Gross Domestic Product of Zimbabwe grew an average of 7% annually, far outpacing Hong Kong’s rate of 5% (a place commonly seen as a bastion of free market enterprise). But was all of this growth real or merely the result of a low starting point and poor management of resources?

Zimbabwe in the 2st Century

For the better part of the 21st century Zimbabwe has been a country whose economy has been on the edge of collapse. There are numerous places to begin assessing why, but many citizens and outsiders looking in view President Robert Mugabe’s tactics as the chief reason. At the end of the 20th century, Zimbabwe had earned a reputation as the “bread basket of Africa” due to yearly crop excesses. Zimbabwe’s fields and farmers were so successful that it was the leading crop exporter in Africa, often filling the bellies of neighbors in numerous countries. However, President Mugabe began to take the nation’s economy down a path of indigenization in the early 21st century that had far reaching impacts on the country. President Mugabe’s plan started with farmlands across the country being seized by the government without payment to the farmers who legally held titles to the land. Those lands were in turn given to poorly educated, mismanaged farmers who turned Zimbabwe from a food exporter to a country on the brink of starvation. The ramification of that decision sent ripples through the rest of the nation’s economy. First banks started going bankrupt because while the farmers still legally owned the land, they had no money to make mortgage payments and the government wasn’t paying the banks so the money dried up. Additionally, numerous other sectors of the nation’s economy depended upon the excesses of the agricultural industry to drive their business. Without the cash inflow from crop exports, money trickling down to these other industries began to dry up. But that was just the beginning of the problem for Zimbabwe as rampant inflation was just around the corner.

Runaway Inflation

Economies can mean a lot of things to a lot of different people, but at the heart of every economy is money. Zimbabwe used the Zimbabwe dollar as its national currency, until President Mugabe’s indigenization plan turned it into a currency with little more value than toilet paper. Another of President Mugabe’s indigenization schemes was to limit the amount of foreign control when investing in businesses and industries in Zimbabwe. Outside investors were limited to a 49% stake in any venture, leading many investors to flee the economy all together. When inflation began to soar, the situation got worse. The resulting economic contraction that came out of President Mugabe’s decisions led to dwindling tax revenue for the national government, which made up for the shortfall by simply printing more money. The country printed and printed its currency until hyperinflation set in. By November 2008 inflation was so bad that prices in the country were doubling every 24.7 hours.

A Coalition Government, Relief, and Growth

A new coalition government came to power in 2009 and immediately helped put Zimbabwe on the path to healing. President Mugabe was still around, but there was now he had to deal with newly seated Prime Minister Morgan Tsvangirai as a check to his power. The U.S. dollar and South African rand were adopted as the national currencies in January 2009 and within a month inflation had fallen to -2.3% and has remained stable ever since. The stabilization of Zimbabwe’s currency led to a massive wave of foreign investment in the country. Businesses invested in industries across Zimbabwe and foreign governments were sending aid or buying government banknotes and bonds by the millions. The result of dollarization within the economy was record growth between 2009 and 2011, but that growth is seen by many as unsustainable in the long term. The result of the country’s latest election in July 2013 raises even more concerns about the future of the country.

Zimbabwe Today

In a shocking twist in the minds of many, President Mugabe won re-election in July 2013 and has immediately made promises that he and the government are unlikely to be able to keep. While the president has made wild promises to increase civil sector pay and military pay, along with promises from his aides to write off debt in some municipalities, few of these things are financially possible. Zimbabwe’s economy stands on shaky ground with much of the growth from 2009-2011 built on heavy lending. The country now has outstanding offshore debts in excess of $7 billion and Western nations such as the U.S., U.K., and EU members are withholding food and financial aid. Outside investors see a nation with growth potential, but no foundation to support it long term. What Zimbabwe needs at this point is an improvement in its infrastructure, support to its industries, and improved manufacturing to make use of its vast mineral resources that offers a better result for the average citizen. While President Mugabe and his advisors see a brighter future, they are literally writing checks they cannot cash and foreign investors (like China) are starting to think enough is enough.