Coming to a slow boil
A cash crunch will test Mugabe’s government now that it is unable to pay salaries on time
imbabwe’s cash crisis is showing no signs of easing. In fact, all indications are that it will only get worse. This could spell disaster for the government of President Robert Mugabe, which faces elections in two years’ time.
Political parties say the country is on a knife-edge. The worsening economic situation has led to opposition parties rallying together at demonstrations, to add to pressure on Mugabe to step down.
In the strongest sign that the wheels have come off, government has delayed paying the salaries of its 550,000 public servants. Most will get paid only next month; the army and police were paid this week. Even their salaries were delayed by two weeks.
The decision to pay the rest of the public servants one month later than expected has already sparked threats of a strike. The Zimbabwe Teachers Association, the largest teachers’ union (it has more than 20,000 members), has said “enough is enough”.
Union representative Cecilia Alexander says it will hear government out before stating its demands.
“But our stance is that we are not going to accept this move of making our salaries come mid-next month,” she says.
Zimbabwe’s cash shortages began last December, when public servants had to endure Christmas Day without their pay. Since then, the situation has deteriorated substantially.
Corruption — an estimated US$2bn is believed to have been illegally siphoned off by individuals and companies recently — as well as a high import bill, a fall in commodity prices, the regional drought and huge government expenditure are some of the reasons for the cash shortages.
Against the advice of the International
ZMonetary Fund, government gave public servants bonuses. This was a move that many believe was done to appease public servants, even though it placed a high burden on the frail economy.
Companies are concerned about their ability to do business. The owner of franchise stores Mugg & Bean and News Café in Harare, Shingi Munyeza, describes the situation as “severe turbulence”.
But the Reserve Bank of Zimbabwe (RBZ) has blamed the cash shortages on the heavy reliance on the US dollar. As many as 90% of transactions are made using the dollar, up from 49% in 2009. Its strength has made it sought after in the multicurrency system which has been in use since Zimbabwe dumped its local unit seven years ago.
Other currencies in the system include the rand, pound, pula, euro and yen. In May, at the African Development Bank’s annual meetings in Lusaka, Zambia, finance minister Patrick Chinamasa said Zimbabwe had become “a fishing pond” for investors to get their hands on US dollars.
To arrest the outflows, monetary authorities will introduce bond notes in October. They will be issued in the form of $2, $5, $10, $20 and $50 notes and will be tradable on par with the US dollar. The new notes will join the bond coins that have been in circulation since December 2014.
The bond notes are backed by a $200m bond facility from the African ExportImport Bank. But the announcement of the introduction of bond notes sparked a run on the banks, sparked by fear that the Zimbabwean dollar was being reintroduced.
Banks have imposed stringent withdrawal limits of $200/person, even though the limit imposed by the RBZ is $1,000. Long queues have become commonplace at most banks as depositors struggle to access funds.
The weakness of the rand against the greenback has made it a relatively unattractive currency. Rand coins stopped being accepted as legal tender by retailers in November last year, even though this is not government policy.
RBZ governor John Mangudya is determined to increase the acceptance of the rand in transactions and also wants to encourage the use of credit cards. Government departments have been given an ultimatum of July 1 to accept payment in currencies other than the greenback.
But he admits there are limits to government’s power. “The governor has no authority to change from the multicurrency system that we are using to the rand because it takes a long time and such an announcement also shocks the market.”
For now, the multicurrency system, with its flexibility, is the most suitable, Mangudya says. But the Bank will do what it can to change behaviour. “Government is the biggest customer in this economy, with almost 60% of transactions, and there is no reason why it should not accept the rand,” he adds.
The cash shortages also test Zimbabwe’s promise to repay the $1.8bn owed to Western-based creditors by the end of June. It was required to do this before it could access new finance.