August 3, 2018 / 10:15 AM / 14 days ago

Breakingviews - Zimbabwe’s renewal hinges on trio of tricky fixes

LONDON (Reuters Breakingviews) - As poisoned chalices go, being president of Zimbabwe takes some beating. ZANU-PF leader Emmerson Mnangagwa was declared the winner of the first presidential elections to be held since Robert Mugabe’s removal in a coup. He will find it harder to prevail over the country’s litany of economic problems.

President Emmerson Mnangagwa greets supporters of his ruling ZANU PF party gather for an election rally in Chinhoyi, Zimbabwe, July 17, 2018. REUTERS/Philimon Bulawayo/

Zimbabwe’s foreign and domestic debt will in 2018 rise to $14 billion, according to its Treasury. That is over 70 percent of GDP, up from 39 percent in 2013. And the country was one of six African nations that the International Monetary Fund judged to be in debt distress at the end of last year. Its big mistake was to adopt the U.S. dollar as its currency in 2009 in response to hyperinflation. With neither the foreign exchange reserves nor the government fiscal discipline to back it up, the policy became a rod for Harare’s back.

Zimbabwean exports are uncompetitive and dollars have been sucked out of the country. The central bank has resorted to a workaround by crediting commercial banks who then pay public sector workers with electronic “zollars”. The dollarised system might have had some credibility in 2009, when hard cash backed 49 percent of bank deposits. But that proportion is now down to 1 percent, according to EFG Hermes. Hence quasi-dollars trade at a discount of over 40 percent to real ones.

A three-step process could help. First, devalue the currency by 50 percent or more to restore export competitiveness. Second, convince global public-sector creditors, such as the World Bank, which hold over $7 billion of the $9.3 billion of Zimbabwean external debt to allow loans to be repaid over decades, rather than years. Finally, slash the public wage bill, which is equivalent to 20 percent of GDP.

Achieving all this will be near-impossible. A devaluation and wage cuts would stoke the unrest that broke out during the election, whose result is being questioned by the opposition. And institutions like the International Monetary Fund will only lend more money if the government has a credible fiscal plan and devises a plan to repay billions of dollars in arrears on past loans. If Mnangagwa can sort out even some of Zimbabwe’s problems, he will have done a good job.

Breakingviews

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