Last evening, after supper, as I settled in to watch the most recent episode of Game of Thrones, my twitter and facebook feeds exploded.
So this issue requires some background. And if you really want the not-very-light-reading version, then you should take a glance at the new IMF report on Zimbabwe that was released yesterday.
But here’s a slightly-updated extract from what I wrote just over a year ago, in the “How is Zimbabwe doing it?” post:
So things in Zimbabwe are pretty 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.
To summarise a very long story:
- 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 (Update: it’s gotten worse). 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 (Update: now confirmed by the Government’s recent attempts to nationalise the diamond mines). (Further Update: to say nothing of the collapse of commodity prices; and the fact that the hydroelectric generators are close to failing due to lower water levels in the dams as a result of the drought).
- So really, that leaves you with the Retail sector. Which does okay, actually. (Update: or, rather, it wasn’t doing as badly as everything else).
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 an imported good selling price has to be paid to the foreign supplier – 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. Especially if you’re not exporting anything near what you’re importing.
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 because the cost of sending small sums of money through the international banking system is something quite extraordinary. So 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 – 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 (Update: it’s now about R15). 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 (Update: half).
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 (Update: a third).
(Update: from one of the new IMF estimates, formal remittances in 2015 were less than half of what they were in 2014)
That’s 5% of GDP – gone. (Update: now seriously higher than that).
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.
But that was a year ago. Things have only become worse since.
And in the last few months, the banks started to run out of money – mainly because the inflows from export proceeds and remittance were being far outstripped by the outflows for import payments (and presumably, the repayments of foreign loans doing the double-dash for the door with the new Indigenisation Law uncertainty). And almost immediately, Zimbabwe started to see a two-tiered internal exchange rate system developing between:
- “notional” US dollars, being the money that is electronically transacting within the domestic Zimbabwean economy; and
- “Real” US dollars, being the cash notes, and the foreign receipts and payments.
The minute you get something like that emerging in a country that is still suffering the ravages of hyperinflation, people get nervous and the cash just leaves the formal banking sector like no-one’s business.
And now, there’s talk of Bond notes and the imposition of more Rand and Euro transactions (which presumably is where you go once you run out of US dollars?).
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.