The economic crisis in Zimbabwe has become a central issue as the country heads to the polls for crucial elections. With high inflation, a slumping currency, and a cost of living crisis, the outcome of the elections will have far-reaching implications for the nation’s future.
One of the key economic concerns facing Zimbabweans is persistently high inflation. In June, inflation jumped to a staggering 175.8%, up from 86.5% the previous month. This rapid increase in prices has greatly affected the cost of living for households and has put significant pressure on businesses. The Zimbabwe dollar has also experienced a sharp decline, plunging 85% in just two months. This depreciation has further pushed up import costs, exacerbating the economic crisis.
The slumping and volatile Zimbabwe dollar has been a cause for concern among voters. The currency’s instability has made it difficult for businesses and individuals to plan their finances and has eroded confidence in the economy. Additionally, elevated interest rates have made it challenging for businesses and consumers to access credit, further hindering economic growth.
President Emmerson Mnangagwa, who is seeking a second term in office, will face strong opposition from Nelson Chamisa, the main candidate of the opposition. Both candidates will have to address these pressing economic issues in their campaigns in order to win over voters. Voters are looking for a leader who can provide solutions to the current economic crisis and steer the country towards stability and prosperity.
The outcome of the elections will have a significant impact on the country’s economic stability. If President Mnangagwa is re-elected, he will have the opportunity to implement economic reforms and policies aimed at addressing the current crisis. These reforms could include measures to stabilise the currency, control inflation, and attract foreign investment. However, if the opposition candidate, Chamisa, is elected, he will have to offer a credible plan to turn the economy around and restore confidence in the country’s financial system.
In response to the currency weakening, the central bank has implemented a significant increase in interest rates, raising them from 140% to an even higher level of 150%. This decision is aimed at mitigating the decline in business and consumer spending. Furthermore, the rapid rate of inflation has surpassed wage growth, resulting in financial hardships for many individuals who are struggling to afford basic necessities. The unemployment rate exacerbates these concerns.
The persistently high inflation and its detrimental impact on the value of the Zimbabwe dollar are indicative of deep-rooted issues stemming from long standing deficiencies in fiscal and central bank governance. Despite the central bank’s concerted efforts to curtail inflation through aggressive rate hikes, it continues to persist.
To address these underlying problems effectively, it will be imperative for the incoming president to prioritise governance reforms. Without such measures, the country will remain trapped in a seemingly perpetual battle against economic turmoil that weighs heavily on voters’ minds.
Governance Vulnerabilities: Undermining the Stability of Nations
In the realm of governance, effective institutions play a pivotal role in exercising authority and ensuring the smooth functioning of a country’s economy. However, long-standing weaknesses in fiscal and central bank governance have far-reaching consequences that can undermine a government’s ability to implement sound fiscal and monetary policies. Such vulnerabilities have been pervasive for many years, leading to economic instability and detrimental impacts on the well-being of its citizens.
An illustrative example from 2005 to 2008 sheds light on the consequences of governance vulnerabilities. During this period, the government pursued an expansionary fiscal policy characterised by public spending averaging 8% of GDP. However, due to weak budgetary processes, spending was less efficient, particularly in crucial areas like education, health, and public infrastructure. As a result, the economy failed to generate substantial government revenue, with an average collection of only about 5% of GDP.
To counter the budget shortfalls, the government resorted to printing money, a practice which severely compromised the independence and credibility of the central bank. The repercussions were crippling, hindering the central bank’s ability to fulfil its mandates, including supporting price stability. Consequently, inflation soared, driven by the influx of printed cash into the economy, while the value of the domestic currency plummeted. This, in turn, led to an increase in the cost of imported goods, exacerbating inflation pressures and creating a vicious cycle.
The culmination of these factors was nothing short of disastrous – hyperinflation. In 2008, inflation in Zimbabwe soared to a staggering 231 million percent. To combat this hyperinflationary crisis, the government was forced to withdraw the rapidly weakening Zimbabwean dollar from circulation the following year, replacing it with the US dollar. The adoption of a foreign currency was seen as a last-ditch effort to stabilise the economy and restore confidence in the financial system.
The case of Zimbabwe serves as a stark reminder of the detrimental impacts of governance vulnerabilities on a nation’s economic stability. Weak budgetary processes, inefficient public spending, and a compromised central bank all played significant roles in this crisis. Crucial sectors like education, health, and infrastructure suffered, as resources were misallocated and not utilised optimally. Furthermore, the unchecked expansion of money supply and the resulting hyperinflation eroded the purchasing power of the population, exacerbating socio-economic inequalities.
Following the transition to the US dollar, inflation in Zimbabwe had decreased until 2019 when the Zimbabwe dollar was reintroduced. Unfortunately, vulnerabilities in fiscal and monetary governance were not addressed during this time, which ultimately led to the downfall of the Zimbabwe dollar in 2009.
As a result of these vulnerabilities, inflation surged to 255% in 2019, marking a staggering 23-fold increase from the previous year. This was caused by a rapid growth in money supply, jumping from 28% to 250%, coupled with a widening government budget deficit that reached over 10% of GDP in 2017. Despite implementing aggressive rate hikes, the central bank has failed to achieve sustained inflation deceleration.
The detrimental cycle between high inflation and a depreciating local currency has once again become evident as the value of the currency plummeted in recent months. As a consequence, the US dollar has become more appealing and is now widely used for essential expenses such as food, fuel, education fees, rent, and various services. In an effort to accurately reflect this reality, the central bank introduced a new inflation gauge in February that tracks prices in both Zimbabwean dollars and US dollars.
Furthermore, due to its perception as a safe haven currency, the US dollar has gained greater significance amid persistently high levels of inflation. The reintroduction of the Zimbabwe dollar has stirred up unpleasant memories of the devastating inflation crisis experienced in 2008 which continues to haunt many individuals today.
Weaknesses in governance breed corruption
Opportunities for higher levels of government corruption arise due to weaknesses in governance. This, in turn, results in public spending waste, inefficiencies, and lower revenue collection. These factors contribute to budget deficits and increase the pressure on a central bank that lacks independence.
According to Transparency International’s ranking in 2022, Zimbabwe was placed 157 out of 180 countries in terms of perceived levels of public sector corruption. This low rank signifies high perceived corruption within the country. Furthermore, evidence indicates that efforts to combat corruption have shown little progress over the past decade. A survey conducted by Afrobarometer also revealed that a staggering 87% of Zimbabweans believe that corruption has either increased or remained the same.
To address these challenges, it is crucial that Zimbabwe implement key reforms. Firstly, fiscal governance reforms should be introduced to strengthen the budgetary process. This will improve revenue collection and enhance the efficiency of government spending. Additionally, these reforms should aim to reduce informality within the economy in order to boost revenue collection.
Secondly, central bank governance reforms are necessary to promote autonomy and preserve price stability through monetary policy independence. Implementing good fiscal governance measures can positively impact central bank governance by reducing the need for central bank financing and thereby lowering inflation.
Zimbabwe’s economy currently faces multiple challenges including persistent inflation rates, higher interest rates, and a depreciating currency. These issues have resulted in an exacerbation of living costs and reduced business activity with fewer job opportunities available. However, with comprehensive structural reforms in place addressing fiscal and central bank governance weaknesses, there is hope for economic recovery and stability in Zimbabwe’s future.
