Our staff writer interviews Steve Hanke, a professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute.
Over four decades, Hanke has advised dozens of world leaders from Ronald Reagan to Indonesia’s Suharto on currency reforms, infrastructure development, privatisation, and how to tame hyperinflation. Hanke has authored a book on this country titled Zimbabwe: Hyperinflation to Growth (2008). He is considered an expert and authority on Zimbabwean economic affairs.
Q: Prior to the GNU in 2009, Zimbabwe ran large fiscal deficits financed by printing money. As a consequence, it experienced the second most severe case of hyperinflation in history, which you were able to accurately measure. By November 14, 2008, you said the annual inflation rate peaked at 89,7 sextillion percent. Prices doubled every day, making Zimbabwe’s 100 trillion dollar notes worthless. You now claim Zimbabwe is experiencing another bout of hyperinflation?
A: Zimbabwe happens to have had two hyperinflations in less than a 10-year period. The first one was a fantastic one that culminated in November 2008 and it was the second highest hyperinflation ever recorded in world history. The prices were doubling every 24 hours and the rate of inflation that I measured was 7,96 sextillion percent.
What happened is after the economy successfully dollarised in 2008 and officially dollarised in 2009, there was the coalition government and everything was working fine, and everything settled down and inflation went away and stability was observed in Zimbabwe and the economy started to grow.
In 2016, the government started issuing new money, you had bond notes and RTGS being issued and in 2017, I actually measured another case of hyperinflation where the monthly rate was 185 percent and the prices were doubling every 20,1 days.
Q: How do you calculate this because this is different from the Zimbabwe National Statistics Agency figures?
A: You calculate these by looking at the exchange rate and using Purchasing Power Parity (PPP) theory, you can transform those changes into implied inflation rates and it is very accurate. So, in both cases, I am the only one who has actually measured accurately the inflation rate in Zimbabwe.
Q: Zimbabwe’s situation has been said to be more of a political crisis than an economic crisis. What’s your take?
A: Well, it’s both because economics is political economy. We used to refer to economics as political economy and not economics, so it’s always political and it always has economic components.
Q: The Zimbabwean government is attempting to address the crisis by acquiring more debt. For example, it’s about to close a $500m credit facility with the African Export Import Bank (Afrexim bank) and recently contracted a fuel loan of 100 million litres to be paid in 12 months from a local businessman’s company. Is this sustainable and feasible?
A: It might be feasible but it’s not very wise. If they get money from Afrexim bank and a business man, it’s not wise because the country is bankrupt, so it’s not a good idea to borrow more money if you are bankrupt.
Q: What are your thoughts with regards to new economic policies, such as a controversial review the Intermediated Money Transfer Tax from 5 cents per transaction to 2 cents per dollar transacted, effective October 1. In your own assessment, can these measures rescue Zimbabwe’s dying economy?
A: The two percent tax was not a very wise decision and it was very poorly timed and that was one thing that created a chaotic market environment, and right after the two percent tax was imposed, it raised a lot of red flags.
Q: President Emmerson Mnangagwa has told the people of Zimbabwe that this new tax on electronic payments was a painful but necessary part of the government’s attempts to revive the economy. What’s your take on this “no pain no gain” trajectory?
A: This idea that you have to have pain to move forward, no, you just have to have the right policies and when you have right policies and everything will move forward in a right way. I have done this in many countries and in many places.
One of the most famous ones was Bulgaria and I was the president’s advisor in Bulgaria. We did a currency reform in 1997 and stopped the hyper-inflation rising at 242 percent a month. It was one of the biggest hyper-inflations in the world. We did the reform in July 1997 for the currency and it stopped the hyper-inflation immediately and by the end of 30 days, the economy had started to boom already. The idea that this takes a long time and you have to have pain, if you do good economics you don’t have to have pain.
You do not tax your way into a recovery and you don’t surprise people with a two percent tax, that ruins your credibility. Credibility is everything in economics and political economy and if you don’t have credibility you don’t have confidence and it’s a real problem.
It’s like going to a witch doctor and saying you have a problem and the witch doctor says, “this cure is going to hurt you but make you feel better when it’s done.” That’s the kind of doctor we are talking about. If you got a doctor, they fix the problem and the pain goes away and this is the idea of putting economic policies and I indicated many times that the Singapore strategy is what they should do.
Q: Zimbabwe Finance minister Mthuli Ncube has told the people of Zimbabwe to give him six months for his Transitional Stabilisation Programme to start making an impact on the economy. Is this programme feasible and is six months not sinking in too deep for any revival to take place in the economy?
A: There was a testimony before Parliament about the budget. There was a big talk about cutting down the civil service and rationalising the civil service and the big problem and mystery is, how are they going to pay the pensions? It is ridiculous. Cutting the civil service is a fine thing to do but if you are cutting civil service, you are obliged to pay the pensions you promised and so the question is, where are you going to get the money to pay the civil servants? That question was never answered.
So, the Finance minister just said by the end of 2019, we are going to pay these arrears to the World Bank, that’s a fine idea. Nothing will happen with the World Bank until the arrears are paid, but the question again is, where are they going to get the money to pay the arrears?
The government promised to pay people something. If you are paying people pensions and retiring them early and settle the World Bank and your obligations, where is the money coming from? All this takes money.
Q: You have, for some time now, been making calls on government to dump the quasi-currencies that are not real money and demonetise the bond notes, yet the government seem to be throwing caution to the wind. What are the consequences of continuing with the ZimBollars?
A: Let me first state that I was adamantly opposed to the issue of bond notes in the first place. I had conversations with RBZ and they asked me what my opinion was about bond notes and I told them it was going to be a complete disaster and now they have a big mess to clean up and they have not put up a plan to clean up the mess. They have to remove the bond notes and RTGS from the monetary system. They have to go back to pure dollarisation. They have to start operating under the rules of pure dollarisation as they were doing during the coalition government.
If they don’t do that the chaos will continue. There will be no way they can look forward on anything unless they get rid of the bond note and the RTGS.
Q: Most Zimbabweans have bank accounts holding electronic money, known as RTGS, or real-time gross settlement. Can this be classified as money?
A: Zimbabweans are smart, they are not stupid. They know they don’t have the money in the bank and if you are a Zimbabwean and you want to pay for a Visa update, they ask you for US dollars. They don’t even accept bond notes or RTGS, they want US dollars, so even the government knows that the bond notes are phony money. People know very well that the bond notes and RTGS are trading at a huge discount on market exchange rate and you don’t have to be a genius to figure all this out.
Q: The Zimbabwean government keeps affirming that US dollars are at 1:1 parity with bond notes, although the currency parallel market is measuring at more than 300 percent. What’s the long-term impact of this forced parity?
A: The bond notes and RTGS are like a cancer in the economy and its going to kill the economy. It has killed the economy. Why isn’t the economy performing like it was during the years of the coalition government? In the years of the coalition government the economy performed well. It was purely dollarised.
The coalition was done away with and the Mugabe government decided they wanted to spend more money yet they didn’t have the money.
Then they said, oh ok, we will make bond notes, we will issue RTGS. So that’s what it’s all about. The bond notes and RTGS are denying reality because the reality is the country is broke and it doesn’t have money to spend and you can’t create money out of thin air. You have to earn it and if you create it out of the air, you literally are creating a cancer.
We already know that’s a cancer for chaos, to start a hyperinflation and it is the only reason Pauline that you are interviewing me. If you didn’t have bond notes and RTGS, you wouldn’t be wasting your time interviewing me. There would be nothing to talk about. Everything would be fine.
Q: Currently, prices of commodities are perpetually escalating and the government seems to be failing to control the inflation. What steps can Zimbabwe take to recover the economy?
A: Good economics is needed in Zimbabwe and I have indicated that the Singapore strategy is what Zimbabwe should follow. Singapore was independent in 1965, it was in much worse shape than Zimbabwe is right now. It was one of the poorest places in the world, a complete disaster, almost ready to got into a civil war.
Lee Kuan Yew was the prime minister. He had a strategy for moving ahead and now Singapore is one of the richest places in the world. It started from zero in 1965 and in 2018 Singapore is rich. It took very little time.
The key aspect of Singapore strategy was sound money, they did a currency board like I did in Bulgaria, the second thing is they were going to pass the begging bowl, and this is the key thing in Zimbabwe.
Zimbabwe only has one strategy, they are looking for foreign aid and they think if they get foreign aid and gifts, somehow, magically, that’s going to turn things around and save Zimbabwe.
Foreign aid has proven to be a failure many times. Singapore never accepted any foreign aid, that was the strategy. The strategy was that we will pull ourselves out of our own boot straps in Singapore and we are not asking and not accepting any foreign aid.
The third aspect that also runs contrary to the situation in Zimbabwe is that Lee Kuan Yew said that we will have a high-quality civil servant, first class wages. So, it’s very small and they are paid very high wages, contrary to Zimbabwe.
Zimbabwe has a monstrous civil service which should be cut at least by 50 to 75 percent and older people should be retired early and paid pensions and replaced with high quality people, getting high wages.
The Finance minister in Singapore right now earns US$1 600 000 annually so everyone’s paid well and everyone’s high quality and there is no corruption in Singapore. In Zimbabwe, it’s exactly the opposite and you have massive corruption.
Q: So, what the antidote?
A: Zimbabwe’s antidote is similar to what I did in Bulgaria; you have to fix the currency problem. You need to fix the currency mess first otherwise you won’t do anything and the reason you have to do the currency first is because no one has confidence in the government right now. The reason they don’t have confidence in the government is the currency mess.
If the government fixes the currency mess, the people of Zimbabwe can have confidence and the government can focus on other things. You have to fix the currency mess first.
You have got to get the cancer out of the economy and the cancer is the new Zimdollar. If the president and government don’t do that, they will be able to do nothing and they will fail. Everything else will fail.
Q: Would you be willing to come, if you were to be invited, to offer expertise and help revive Zimbabwe’s economy like you did in Bulgaria?
A: The answer to that is in two parts. I am very fond of Zimbabwe and I would be happy to give any help to Zimbabwe. I would be more than happy to do it. That’s the first part of the question, that is about Zimbabwe people.
The second part is trickier, because if you are asked to be an advisor to a government, I would have to do it on my terms. You have to be assured that as you are being taken on as advisor, you have to take authority to do things. So, if it’s just to come as an advisor without any authority, without anyone listening to you, it’s a waste of my time, I have other things to do.
But if the conditions would be right in principle, it’s conceivable. If all the conditions were right, but the main condition is that you have the trust and authority of the president and the government and the authority to actually do something.
You can be a minister but if you don’t have any authority to do anything, it’s a waste of time being a minister. In Bulgaria, I had complete authority that was given to me by President Stoyan Alexandrov.
I had his confidence and I had authority and I designed the currency board and I installed the currency board and did the currency reform, I stopped the hyperinflation and then we went on to fix other problems.