Whenever anyone asks where I’m from, and I tell them “Zimbabwe”, I get the following follow-up questions in rapid succession:
- How are things going up there?
- Is Bob still kicking? Eish
- But are your parents safe though?
To which I have the following rote responses:
- Things are tough.
- Yes he is.
- A lot safer than they would be here – that’s for damn skippy sure. I mean, Zim’s unemployment rate is somewhere between 80% and 95% (depending on who you quote), and our load-shedding happens for days at a time, but you still don’t find anyone destroying Rhodes’ grave in the Matopos and getting free and loose with a machete.
But the trouble is: things in Zimbabwe really are tough. More and more businesses are closing. Tax law enforcement is getting more draconian as the fiscal base shrinks (which makes it shrink even faster – but, well, desperate times). Almost every news article reads something along the lines of*:
*taken from this article in the Zimbabwean
According to the CZI’s 2014 State of the Manufacturing Sector Survey released in October, company closures in the country had reached alarming levels.
The prolonged effects of power cuts and costs, liquidity challenges, low domestic demand for products among others had weighed heavily on the economy.
And every time I go home, there is more resignation, more fatigue, more disillusionment. Some anger, I guess – but we’re now about 15 years into the general repression-depression story, and people seem more numb than enraged.
So to summarise:
- Local manufacturing is more or less dead. And if it’s not dead yet, it soon will be – the plant and machinery hasn’t been replaced in, well, a good 15 years or so.
- Agriculture in general is under-financed, under-capitalised, and cannot meet local demand. There are some pockets of success, true. But even if you take the economics out of it, the country has been suffering from drought. Climate change is real: and it affects the under-capitalised first and worst (after all, if you don’t have irrigation equipment – you’re properly at the whim of the weather).
- The mining industry should be booming (for example, Zimbabwe has a quarter of the world’s diamonds) – but it also suffers from under-capitalisation. And the general rumour is that some of the mining industry has gone, ironically, underground. Controlled by nameless foreign mafia-esque gangs, etc.
- So really, that leaves you with the Retail sector. Which does surprisingly well, actually.
And the big question is: how though?
Because on the face of it, it’s not clear how people still have money to buy anything at all. Most retail goods are imported – meaning that the bulk of the profit gets left in the hands of foreign companies.
Let me do the math for you. And I’m going to assume that the 50% of the imported good selling price stays in Zimbabwe – so once you take out the duties charged by the Zim government (around 40%), it leaves 10% to cover the local costs of the importer:
- Say that the country starts with $100 million in the hands of consumers to spend.
- So $100 million gets spent in supermarkets.
- $50 million stays in the Zim economy, and $50 million gets paid to foreign suppliers.
- So now there is only $50 million for the country to spend.
- That $50 million gets spent in supermarkets.
- Of which $25 million gets to stay in the Zim economy, and $25 million gets paid to foreign suppliers.
- Now there’s only $25 million to spend.
- $12.5 million of that gets retained in the local economy, and $12.5 million gets paid to foreign suppliers.
- And so on.
Before long, there should be nothing left.
And yet, there is. And even if that process is happening – it’s not happening as quickly as you’d expect.
The Most Productive Segment of Zimbabwe’s Economy…
…is ironically not in Zimbabwe at all.
The Zimbabwean diaspora is massive relative to the local population – by 2011 estimates, at least 10% of the population has emigrated (and by UN estimates, that number is closer to 20%). But that 10% represents:
- about 20% of the labour force (or about 38% if you take the UN estimates);
- half the country’s doctors;
- a quarter of the country’s nurses.
And that diaspora is remitting money back to their relatives who stay in Zimbabwe. Through the official banking channels:
- $2.1 billion was remitted back to Zimbabwe in 2013
- $1.8 billion was remitted in 2014
And we’re talking about after-tax free cash, just through the formal channels. Then you have to consider that most people prefer to send money with friends or in kind – as the cost of sending small sums of money through the international banking system is extraordinary. And when you take the informal channels into account, some estimates place the value of remittances in 2014 at closer to $3.5 billion.
To give an idea of size:
- At $2 billion, formal remittances are equivalent to about 20% of GDP.
- At $3.5 billion, we’re taking about 35% of GDP.
In after-tax free proceeds.
If you were to try and find an industry that places that kind of money directly into the hands of unskilled low-income labourers (the main recipients of these remittances) – I’d guess that you’re looking at an industry that is equal in size to the entire Zimbabwean economy. If not bigger.
So if you’re wondering how we’re still going – it’s because of the diaspora.
The Last Few Years…
If anyone was wondering why things have gotten more difficult in the last two/three years – I’d put my money on the depreciation of the Rand.
The largest chunk of the diaspora live and work in South Africa (±2 million Zimbabweans). The earn their money here, and send it home for their relatives to buy South African goods in Zimbabwean supermarkets.
Three years ago, the exchange rate was about R7.50 to the dollar. Today, it’s about R12. Even if the Zimbabwean worker was sending home the exact same amount of rands every month, it would be two thirds of whatever they were worth in dollars three years ago.
And if South Africa was sending 70% of remittances in 2012, that would mean a cut in total remittances (and the effective free cash in the economy) by about a quarter.
That’s 5% of GDP – gone.
Then when you consider the multiplier effect of less money = less spending = less profit for Zimbabwean companies (and South African ones!) = layoffs and shutdowns = dreadful spiral…
…it’s not surprising that the atmosphere is so dire.
The good news: when global trade swings back into risk-on, and the Rand recovers (see here), then the recovery should be swift (after all, it’ll be a direct injection of cash into the hands of consumers).
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Anonymous April 27, 2015 at 08:11
With the remittances being so significant, isn’t there some way to at least start migrating to an economy that’s more independent? Or are the people who might have the enterprise to effect this sort of change the very people who are sending the money? In your opinion, what’s the way out?Reply
Jayson April 27, 2015 at 09:51
I think that the building blocks are there for that to start happening at some point.
But the reality is: you don’t get investment when you have so much fiscal aggressiveness. Even when the laws are fair, they’re applied unfairly. If this were just social policy issues, then I think you’d find more investment. But because the regulation is directed at the economy itself – the capital flight continues.
In my mind, the real turning point will come when government lets go of its civil servant overhang. That salary bill needs to be cut – which will make government spending more discretionary. That will allow the tax authorities to give breathing space to businesses, which will allow those businesses to actually operate, which will restore some of the lost tax base. Then those lost jobs can be taken back up.
Unfortunately, the longer it takes to happen, the more the need to pay civil servant salaries will strangle businesses.
So we’ll have to see.Reply