Submitted by Serban V.C. Enache…
Emmerson Mnangagwa, the President of Zimbabwe, visited Moscow in January to secure close economic cooperation with Russia and seek aid. Zimbabwe is currently facing runaway inflation, a shortage of foreign exchange balances, fuel stocks, food, and pharmaceuticals. Mnangawa declared 2019 as the year of “rebuilding,” wants Zimbabwe to catch pace with its more developed neighbors, and seeks to break the country’s 20 year-long isolation epoch by reaching out to the Russian Federation.
Some background into Zimbabwe’s situation
To be perfectly clear, land reform had to be carried out in Zimbabwe. Having a white minority [1 percent of the population], thrusted onto the native population during the colonial era, owning the largest portion [70 percent] of the land and most of the capital was an unsustainable political situation. That being said, Mugabe went about it in the wrong way. It would have been much better to implement land-value taxation to resolve the [historical and socio-economic] inequity. It would have been orderly, clean, and effective.
Instead, the revolutionaries who gained Zimbabwe’s freedom from the colonial masters were allowed to just take over profitable, white-owned commercial farms which had hitherto fed the population and employed most of the working class [today that percentage is 66 percent]. The new owners lacked the know-how, the capital, or both, and as a consequence, Mugabe’s reform turned out to be an utter failure, directly contributing to a collapse in domestic output. The collapse in agriculture, which provides not only seminal output for domestic consumption, but also foreign currency via exports, foreign currency needed to pay for seminal imports, pushed the unemployment rate to 80 percent. The collapse in general output [45 percent of capacity], alongside brazen corruption and political instability, severely widened the gap between Government spending and Government tax revenues. The situation was compounded as key infrastructure was neglected and new constraints flowed throughout the supply-chain. For instance, the National Railways of Zimbabwe had decayed to such an extent that in 2007 mineral shipments destined for export registered a 57 percent decline.
Another example was manufacturing. The Confederation of Zimbabwe Industries published various reports: industrial output fell by 29 percent in 2005, 18 percent in 2006, and 28 percent in 2007. In the latter year, only 18.9 percent of Zimbabwe’s total industrial capacity was being used. This encompassed a number of problems, such as a shortage in raw material inputs. The manufacturers blamed the central bank for stalling their access to foreign currency needed to buy inputs from abroad. However, the country’s central bank had prioritized the use of [limited] foreign currency to import food. Moreover, imported goods were also prevented from entering the country in normal fashion, because importers abandoned goods at the border, in order to dodge exorbitant tariffs. And the response of the Mugabe administration of buying political favors through net increases in Government spending, without expanding physical productive capacity, was always going to generate inflation on top of the supply-side factors.
I’d like to add a very important observation: radical fiscal austerity wouldn’t have helped Zimbabwe rein in the hyperinflation, given the source of the problem – in fact, it would have made it worse. Currency hyperinflation ended [in 2009] when the Government gave legal tender status to several foreign currencies and dropped legal tender status for its own national currency [ceasing its issuance and acceptance in payment of Government financial obligations]. But the supply-side problems and shortages [albeit improving to one degree or another] persisted.
The overproduction of money was a consequence, not the cause of hyperinflation in Zimbabwe. As a matter of fact, a careful study of all hyperinflation episodes in history reveals the following causes: loss of a war, economic warfare, collapse in output, brazen corruption, political instability, the end of a fixed exchange rate tied to a strong currency.
Present day situation and Russian partnership
Currently, the agriculture sector employs 66 percent of the working population and accounts for 20 percent of exports. A main export crop is cotton, split into two tiers: high-end quality A cotton and lower-end quality B cotton. Kudakashe Mabona, a farmer at a local company, provided insight into the micro-economic realities of the business. At the end of the season, the agri-firm managed to grow ten million baskets of cotton, in spite of facing an epidemic of pests and problems with irrigation in some areas. Still, the financial situation looked good, keeping their heads above water and even allowing them to keep investing.
A high cost farmers face is the price of fertilizer, priced at 500 US dollars per ton, largely due from logistic expenses and partially due to imported ingredients [not available domestically]. Zimbabwe is a land-locked country. Being able to produce its own fertilizer would go a long way in putting farming costs down and making their produce more competitive in foreign markets. Zimbabwe’s Minister for Agriculture, Bernard Mache, said the country’s soil is poor in nutrients. And thus requires good fertilizer for its over two million hectares of land in order to achieve proper harvests. The Russian corporation URALCHEM signed an agreement to supply the precious commodity in October last year. Since then, Mnangagwa had several meetings with the company’s executives and shareholders. In the first year of cooperation, URALCHEM delivered 100,000 tons of fertilizer to the Zimbabwean market. For 2020, the company expects the number to increase several-fold.
URALCHEM’s Deputy Board Chairman Dmitry Konyaev said the country has great potential. He commented that the soil temperature on the plateau varies throughout the year between 25 and 27 degrees Celsius, making harvest forecasts more accurate and business affairs more predictable. Konyaev pointed out that Zimbabwe was one of the last countries to be relinquished by the British Empire [in 1980] for a reason. Because it’s an “incredibly rich” region for agriculture. For URALCHEM, the African market holds tremendous importance on a long-term basis, which requires large volumes of fertilizer every year. Sub-equatorial Africa, in the next decades, will experience the largest population growth compared to any other region. Today, between 1.2 and 1.3 billion human souls live on the African continent. The number will reach 2 billion by 2030. The present amount of fertilizer added to African soil is several times smaller compared to the developed world. Fertilization in sub-equatorial Africa on average is 16 kgs per hectare, while the developed regions add between 150 and 200.
Though Russian business arrived in Zimbabwe after American, Chinese, and Middle-Eastern firms, it’s not too late to catch up, develop, and expand. URALCHEM plans to create a hub in Zimbabwe that will manufacture, store, and transport fertilizer for the entire region. The project enjoys public support from the sitting president. Emmerson Mnangagwa wants fertilizer to be manufactured in his country and wants to export it to the whole region, including to Botswana, Malai, and Zambia. The president also invited Russian firms to take part in mining projects.
In June this year, Mnangagwa changed the currency regime. Prior to this move, the country had been using a basket of nine foreign currencies: the pound sterling, the euro, the yuan, the Australian dollar, the Indian rupee, the South African rand, the Botswana pula, the Japanese yen, and the US dollar being the dominant among them. The new Zimbabwe dollar, at par with the RTGS dollar [introduced around the same time] and the bond notes and coins, is now the sole legal tender in the country – claimed the Finance minister. But in practice, things sit a little bit differently. Tariffs and value-added tax on imports of luxury goods have to be paid in foreign currency; and payment for international airline services in foreign currency is still allowed. The president said that the Government having no control over the money supply and availability of the currencies in use was unacceptable – hence his decision to abrogate the multi-foreign-currency system.
For Russian firms [so demonized in the West] opening up into foreign markets entails logistical, financial, and above all, political risks. But with a friendly head of state, things are much easier. Mnangawa just has to rein in corruption to “reasonable” levels and maintain political stability. I salute his decision to move to a single currency system, but I caution him that he needs to keep a stable demand for the Zimbabwe dollar. This means actually collecting taxes and enforcing them across the board, while allowing the quantity of the currency to fluctuate according to lawful/productive demand: strict regulations on bank lending [horizontal expansion of the balance sheet] and on Government net spending [vertical expansion of the balance sheet].
Regarding the former, cheap loans should go toward wealth-creative endeavors. Loans shouldn’t be approved at all for speculative [wealth-extractive] purposes. Regarding the latter [Government net spending], budgeting rules have to be in place in order to prevent excessive and chaotic allocation of funds. Full transparency should be pursued when formulating, approving, and tracking these budgets. Estimating the impact on the Government’s net fiscal position and constraints on it should only be formulated with the aim of achieving and maintaining full employment and price stability. I realize that all this is 99 percent wishful thinking, but without hope, there’s nothing…