Eddie Cross on Zimbabwe - Collapse looms

29th May 2007

Subject: Eddie Cross on Zimbabwe

Collapse looms.

In my own business we passed a milestone today – by our calculations inflation in our business now exceeds 10 000 percent per annum. I was told by my supplier today that flour for the bakery would now cost me Z$250 000 for a 50 kilogram bag and that I have to collect it at my own cost from Harare – 600 kilometers distant, the last time I bought flour from the same supplier it was Z$30 000 a 50 kilogram bag delivered to Bulawayo.
We have given our staff a 100 per cent raise at the month end for two months now – it still leaves them with insufficient funds to cover their basic costs of living. We started today to provide food to them in addition to their wages or they simply will not be able to feed their families and come to work.

One major supplier told me today that they are selling every product in their range below cost. They are headed for bankruptcy and do not know what to do next. Another service provider told me they were not able to replace their stocks of spares and essential inputs. When they had run their stocks down to zero, they would then go onto a hand to mouth basis, asking their clients to source the required spares and raw materials before they could start work.

Fuel is trading at Z$45 000 a litre, the dollar at Z$50 000 to 1 against the US dollar and it has depreciated by 50 per cent in a week. I estimate prices are rising 20 per cent a day and this is putting huge pressure on all firms.

There is no sign of this process slowing down and with the government simply spending wildly in anticipation of an election in 2008, we cannot expect inflation to slow – we are headed for super inflation in the near future. It will then be impossible to hold money – people will have to consider barter and the widespread use of another currency. In Mozambique when they were experiencing similar conditions the common currency was the US dollar. The same situation existed in Angola but because of the shortage of actual foreign currency notes there, they also used things such as canned beer and coca cola as currency.

The difficulty in Zimbabwe is that we have a relatively sophisticated economy and strict currency controls. The use of either the Rand or the US dollar for exchange would actually be illegal at present.

From other countries experience this situation will be bound to escalate the collapse of the formal sector, exacerbate human and capital flight, destroy the value of savings in any form except property and the stock market and plunge civil servants, whose conditions of service are less flexible, into a state of crisis.

In the face of these critical concerns, neither the government nor the Reserve Bank exhibits any concern or understanding of just what they are doing. Their remedies suggest they have little understanding of the complexities of macro economic management policy or how the economy and business actually functions. Virtually every prescription they have trundled out in recent weeks has simply made things worse.

Food is scarce and unaffordable and a real humanitarian crisis is building up – one that might still threaten national stability and put the lives of millions are at stake. There is plenty of evidence that Zimbabweans living in the Diaspora are pouring money into the country to try and keep their families afloat. With some 4,5 million adult Zimbabweans abroad, this carries quite a punch and is probably the single most important factor in helping keep things stable.

Eddie Cross Bulawayo, 29th May 2007