The true story of Zimbabwe's hyperinflation

IMF contributes to Zimbabwe's hyperinflation

RECET OPINION ARTICLES

By Thomas J. Hornes
Last updated: 12/01/2008 22:41:04

THE IMF disputes the existence of any connection between Zimbabwe’s hyper-inflation and Zimbabwe’s printing - since 2005 - of ZW$21 trillion which it used to buy foreign currency from the parallel market and paid off its IMF debt arrears.

In a statement attributed to the IMF Director of External Relations, Thomas Dawson the IMF:

1. is still questioning the source of the foreign currency Zimbabwe has used to clear its IMF debt arrears;

2. is unaware of shortages of food, fuel and medicine bedevilling Zimbabwe; and

3. believes that if there have been shortages of basics as suggested, these have been caused by Zimbabwe’s failure to institute a comprehensive package of macro-economic and structural reforms.

Generally speaking, the IMF position stated above is dishonest. The IMF must accept that instead of ensuring world economic stability; in the case of Zimbabwe and other countries, it has been complicit in economic destabilisation. In fact, there are strong grounds for concluding that the IMF, as a global lender has been used by its principal powerful shareholders, in particular the IMF to penalise Zimbabwe for its national policies.

This is not to suggest that the IMF has caused Zimbabwe’s economic problems. Far from it; Zimbabwe’s land and other poor economic policies have resulted in a 6 year economic recession, de-industrialisation, loss of skilled labour through emigrating and increasing impoverishment. In addition, political violence, erosion of the rule of law, and basic human rights has resulted in international isolation.

However, the IMF has unfairly treated Zimbabwe. This has exacerbated the country’s economic recession, worsened the plight of a politically suppressed populace, worsened the social and economic effects of unemployment, of the AIDS/HIV pandemic, and the social fabric of the country.

When Zimbabwe defaulted on its IMF debt in 2001, the IMF refused to reschedule this debt, or offer Zimbabwe alternative lines of credit or other support geared at ensuring that the economy remained relatively stable. IMF has learnt such support to countries such as Argentina which defaulted on their sovereign debts. Instead expulsion procedures were activated. And it would seem that in some mad desperation, Zimbabwe has lately been printing Zimbabwe dollars which it used to finance the payment of its IMF foreign currency debts.

What explains this unfair differential treatment, given that Zimbabwe is not the first or only country to default on its IMF debt?

The answer is found in an American law called the Zimbabwe Democracy and Economic Recovery Act 2001 [1], which enabled the United States government to block any finance applications made by Zimbabwe to multilateral lending institutions, such as the IMF and World Bank in which the US has majority shares or influence. In other words, using its powerful influence over the world’s lending agencies the US imposed economic sanctions on Zimbabwe by imposing a world-wide freeze on Zimbabwe’s ability to access international credit. The reason: the US was unhappy with Harare’s political policies and in particular, its land expropriation policies.

The IMF remains accused of being an instrument of American foreign policy. American policy being hostile to Zimbabwe the IMF by extension opted to call in Zimbabwe’s debt, instead of entering into good faith rescheduling talks, extending lines of credit, some debt cancellation, etc, as happened before with other countries.

The government was obviously aware that its cash printing exercise would fuel hyper-inflation. By opting to print local currency to buy foreign currency from parallel market traders, Zimbabwe was evidently desperate. Because the IMF called in as opposed to rescheduling Zimbabwe’s debt, no other major international lending agencies lend to Zimbabwe.

Printing paper money to fund government expenditure and onerous debt payments whose value is not linked to productivity and earnings fuels inflation. In the case of Zimbabwe, this had led to hyper-inflation and its insidious side effects. Hyper-inflation decimates savings and earnings; it impoverishes people over a very short period of time, causes economic instability and above all, social and political upheaval.

This is the problem the IMF faces. If it accepts that its inflexible and American influenced position refusing to reschedule Zimbabwe’s IMF debt has forced Zimbabwe to print Zimbabwe dollars in order to fund its debt payments, leading in part to the country’s hyper-inflation, then it must accept that it is partly responsible for the impoverishment of the ordinary Zimbabwean. It must have been all too obvious to the IMF that Zimbabwe could not afford to make its debt-arrear payments. And that if made, the payments would cause shortages and a massive contraction in the economy and inflation.

The callous manner in which the IMF has treated and continues to treat Zimbabwe illustrates some of the reasons behind the calls for the reform of the IMF.

It is true that there should be greater transparency in Zimbabwe’s financial transactions. However, the IMF’s continued questioning of the source of the money used by Zimbabwe to pay their IMF debt arrears is patronising and smacks of bad faith. Since it decided not to reschedule Zimbabwe’s debts which would have given the country room to breathe and strategically plan, the IMF should simply be content to receive its dues. Period! Are the same questions asked of countries that pay their debts to the IMF? Surely, the IMF cannot micro-manage Zimbabwe’s economic affairs.

Mr. Dawson is of course correct when he states that shortages in Zimbabwe have been caused by Zimbabwe’s refusal to implement comprehensive economic and structural reforms. And these reforms need not necessarily be IMF sponsored or structured. At the end of the day, the buck must stop with the ZANU PF government. And it is the Zimbabwe government’s obligation to put in place an economic regime that engenders stability and growth. However Harare’s political sins do not justify the IMF’s actions which have increased poverty in Zimbabwe. The IMF must be part of the solution and not be part of the problem. In the case of Zimbabwe, the IMF has unfortunately contributed to the country’s perpetual economic crisis.

Mr. Dawson’s reported response in which he is alleged to have rejected the suggestion that in the past year there have been shortages of food, fuel, and medicines in Zimbabwe, and that these could have been worsened by the onerous debt payments bordered on the ridiculous. Who doesn’t know about Zimbabwe’s now fabled food, fuel and essential medicine shortages?

Mr. Dawson’s reaction is however understandable for the reasons already stated. If he had accepted that Zimbabwe was forced to pay around US$200 million to the IMF in the past 12 months in order to avoid expulsion from the institution, he must of necessity accept that if the IMF had rescheduled Zimbabwe’s debt, Zimbabwe could have used this amount to pay for much needed imports as well as stabilise its currency, reduce inflation and thereby its economy.

This criticism of the IMF does not absolve the Zimbabwe government of any blame for the economic collapse of the country. To be fair, Zimbabwe’s practice of printing money to fund expenditure, and the Reserve Bank’s practice of dishing out money to unproductive parastatals, and the continuing disruption of commercial farming, and repeated threats to private property underline the causes for the continuing economic collapse in Zimbabwe. In addition, ZANU PF’s mad policies are the reason why the US, the EU, Australia and a few other countries imposed unfortunate and punitive economic sanctions on the country; which others prefer to call smart sanctions.

Zimbabwe has an obligation to engage with the IMF. However this is not a one way street. The IMF must engage with Zimbabwe in good faith. The IMF must enter into negotiations with a view to rescheduling Zimbabwe’s outstanding debt. Zimbabwe must undertake major structural and economic reforms. And in conclusion, political considerations must not influence IMF lending conditions.

Hornes is a financial services lawyer

[1] The Zimbabwe Democracy and Economic Recovery Act (S. 494) is an act passed by the United States Congress sanctioned to provide for a transition to democracy and to promote economic recovery in Zimbabwe. Senators Bill Frist (R-Tennessee) and Russ Feingold (D-Wisconsin) introduced the bill on March 8, 2001. Senators Frist, Jesse Helms (R-North Carolina), Hillary Rodham Clinton (D-New York), and Joseph Biden (D-Delaware) sponsored the bill. The Senate passed the bill on August 1, 2001 and the House passed the bill on December 4, 2001. President George W. Bush signed it into law on December 21, 2001. Simbi Veke Mubako, Zimbabwe's ambassador, and Cynthia McKinney accused supporters of the bill of anti-black racism.