Black Friday: A spark fell into a keg of rumour, nervousness and blind panic

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The year 1997 was a pivotal one for Zimbabwe as many factors coalesced into crisis. This week we discuss “Black Friday”, the day when there was a sudden drop in the value of the Zimbabwe dollar in the official auction system followed by a dramatic fall in share prices.

Set the scene.
The late 1990s were a difficult time in the country due to a changing economy as a result of the IMF’s Economic Structural Adjustment Programme (ESAP) and the beginnings of an unsustainably inflationary environment.

As reports from the Central Statistical Office and others show, the figures are not easy reading but need to be mentioned here for the purposes of context. As a percentage of Gross Domestic Income, the share of wages had dropped from 57% in 1987 to 39% in 1997, while the ratio of profit increased from 47% to 61% during the same period.
Inflation increased from 11.6% in 1985 to 32.6% in 1996, falling to 25% by 1997. Real wages had fallen by nearly 25% and employment growth declined from an index of 2.4 to 1.5. Poverty levels had increased from 40.4% in 1990/91 to 63% in 1996.

The value of the Z$ to the US$ had fallen by nearly 25% from July to October. By the beginning of November 1997, nearly 100 job actions had taken place in the country due to rising costs of food, business closures and a shrinking fiscus.

It wasn’t all bad news surely?
There were some positive developments in the economy in 1997. Turnall and Cottco listed on the Stock Exchange and several companies – notably in the tourism sector – had announced aggressive plans for expansion of production and services.

McDonalds, the US food giant, announced they were searching for a local partner to build their first restaurant in Zimbabwe. KFC had just opened for the first time in Bulawayo. The Westgate Mall in Harare was opened and the Joina Centre project was begun as was Centenary Footbridge over Julius Nyerere Way.

In Bulawayo, the National Railways celebrated 100 years of service to the nation with the announcement of new rolling stock and locomotives. Bulawayo city centre had added sparkle with the completion of the Bulawayo Centre and Nkulumane Shopping Mall, both multi-million dollar investments.

A billion-US$ thermal electricity power generation plant in Gokwe was announced as a joint venture between Zesa, Rio Tinto and National Power Corporation, a British firm. The “instant-win” scratch cards for the State Lottery were introduced late in the year, while the perennial shortages of vehicles were easing somewhat. Finally, locally-made canned beer was made available to the public for the first time by National Breweries in time for Christmas!

What was the spark for the collapse?
Depending on who is doing the analysis, the crash is attributed to a number of factors. The failure of the IMF’s ESAP is always cited as a contributory cause. Some studies have concluded that the crisis was mainly driven by some government policies ranging from expenditure on war veterans to the land reform and involvement in the SADC defence of the DRC although many of these policies had not yet been announced, let alone implemented.

For a start, the main action in land reform was still two years away; in 1997 the Government was still negotiating with both the large-scale commercial farmers and the donor community on the best way forward to what was a firming stance that extensive land reform could not be deferred again for much longer.

The extra spending on defending the DRC Government against a Rwandan invasion was still a year away in August 1998.

The actual spark was fairly trivial. There was likely to be extra spending power by year end with bonuses being paid and war veterans having negotiated a bonus deal.
Several merchants, and one, now bankrupt, in particular put in significantly larger than expected bids for the free market currency on offer to buy imported goods to mop up this extra cash after a toughish year.

But this spark was struck in an environment where many in business were spooked by rumours, false information and lack of first-class factual information.
And so as a run started others panicked over their essential inputs, and the run grew very bad.

Behind the scenes
Behind the scenes, the Government was firming up its stance expressed in its election manifestoes and recognizing that promises of international aid for land reform, and increasingly burning issue, were unlike to be realized. The main blow came in a letter from a junior minister in the new Government of Tony Blair, Clare Short, to Minister of Agriculture Kumbirai Kangai on 5 November 1997.

You can easily find and read the whole letter online, but the inflammatory paragraphs are considered to be: “I should make it clear that we do not accept that Britain has a special responsibility to meet the cost of land purchase in Zimbabwe. We are a new government from diverse backgrounds without links to former colonial interests. My own origins are Irish and as you know we were colonised not colonisers.

“We do however recognise the very real issues you face over land reform. We believe that land reform could be an important component of a Zimbabwe programme designed to eliminate poverty. We would be prepared to support a programme of land reform that was part of a poverty eradication strategy but not on any other basis… If we look to the present, a number of specific issues are unresolved, including the way in which land would be acquired and compensation paid – clearly it would not help the poor of Zimbabwe if it was done in a way which undermined investor confidence.”

But how could this be blamed?
It is important to remember that this letter did not become public knowledge until much, much later but it nonetheless set the tone for government’s attitude and strategy for the next three years. Apart from its patronising and insulting tone, this letter communicated many things to the Zimbabwean leadership.

The insult to the President and government was massive. It made it clear that the British Government was wrongly attempting to absolve itself of any responsibility towards assisting land reform and supplying the necessary fiscal support to achieve the same.

The control of land remains an essential pillar of government policy and in the 1990s, there was intense pressure to honour the promises made during the war of liberation to re-distribute land and to look after those who had sacrificed so much for Zimbabwe’s Independence.

The fact that the British, and thus presumably other international donors were trying to extricate themselves from their voluntary promises of support signalled a need to change tactics to achieve these aims, creating an internally-focused approach that would prove to be much more combative than anything ever witnessed in the country’s history. Allies would be needed for these burgeoning plans.

Other economic pressures?
Another challenge for the government after 1980 was how to honour commitments to the 100 000 or so liberation fighters. At least 43,000 were absorbed into the security and civil services while small grants were supplied to many others to help them find other occupations in civilian life.

This was not easy and by 1989, war veterans established the Zimbabwe National Liberation War Veterans Association (ZNLWVA) which was followed by the War Veterans Act (1992) to cater for their welfare. Under new leadership in 1996, the ZNLWVA began insisting on compensation for their wartime sacrifices via the War Victims Compensation Act (1993). Demands were also made for them to receive pensions and other benefits enjoyed by civil servants which included once-off payouts of Z$50,000 (then US$3,570), a monthly pension of Z$2,000 (then US$143) in addition to funding for their family health care, education and burial needs.

The government acceded to these demands. Although it was arguably the moral thing to do, some economists believe it could have been done in a staggered and productive manner, by asking them to go into various projects which the Government could fund. This was not an option considered in 1997. With at least 50,000 registered war veterans, this amounted to an immediate, extra Z$4,2 billion (US$300 million) cost for the national budget and an equal flow of cash into the economy.

Walk us through events on 14 November 1997.
Shortly after trading began on the day, a run began which was arguably fuelled by speculation and import demand. The Zimbabwe dollar fell by 71,5% against the greenback, while the stock market crashed by 46% as investors rushed for the United States dollar.

For most of the afternoon it traded at between Z$19 and Z$25 and up to Z$45 to the British pound. Late into the trading day, the Reserve Bank intervened with a US$15 million forex injection to shore up the local currency. The day ended with the Z$ trading at between Z$14 to Z$18 to the US dollar. This was, at the time, the lowest value of the Z$ ever recorded, all the more frightening with the rapidity of the crash.

As quoted in the Herald (14/11/2014), Emmanuel Munyukwi, Zimbabwe Stock Exchange chief executive at that time, said, “There was a bloodbath on that day… Investors, particularly foreigners, sold their stocks because the level of depreciation was significantly affected. It took a lot of time for the market to recover.”

So why did this fall happen?
The traditional story, widely accepted in Zimbabwe and beyond today, is that the government would pay for the war veteran gratuities and would need a supplementary budget. Investors decided to exit from Zimbabwe’s economy based on false rumours of how funding would be done.

Herbert Murerwa, then Minister of Finance was quoted in the Herald of 15 November 1997 as saying that the government had a plan to pay (later revealed to be hikes in various taxes, themselves reversed by the end of 1997). The role of the ex-combatants is important not least because of the behaviour of some in their demands which frightened conservative investors and donors. This is obvious in the decision by the European Community to withhold more than Z$300 million support of Zimbabwe’s economic reform programme until clarity was achieved.

Ok, so what else contributed?
The Herald (15/11/1997) stated that analysts at the time said the plunge was due to large foreign currency payments (US$15 million) being made on the same day. “There was forward liquidation of liabilities with money borrowed on the local market on the speculation that the Zimbabwe dollar would be worth much next year [1998] than it is now when they are supposed to make their payments and repayments for foreign commitments” (The Herald, 15/11/1997).

Matters were not helped by the fact that at the time, the Reserve Bank of Zimbabwe had not disclosed the extent of its forex holdings and rumours spread that the coffers were empty, i.e. less than two months reserves to cover imports, leading to panic buying during the week, reaching the pinnacle on 14 November 1997.

The RBZ had announced in the September Monetary Policy that reserves were lower than the previous year, down from close to US$1 billion in August 1996 to less than US$456 million in July 1997; the decline was due to depressed earnings from tobacco and minerals and higher importer demand.

Thus it is clear that a failure by the authorities to provide timely and accurate information to the market which intensified fear and speculation. There were also false rumours in the week of 14 November that the IMF would be suspending its balance of payments support to the country.

And the aftermath?
What is perhaps forgotten in the publicity over the events on 14 November is the fact that the Stock Market also crashed by 560 points in the week of 19 November, at the time its largest ever fall. The Industrials fell from 9,686.01 to 9,126.50 while the Mining stayed put at 654.54 points.

This six percentage point decline was blamed on the continued uncertainty over the payouts, the designation of over 1,500 commercial farms for forced acquisition, news of increased taxes and thus less disposable consumer income, and the lack of progress on balance of payment support for ESAP. The decision by the RBZ to increase the rediscount rate by three percentage points to 28,5%, the second such increase in 1997, and the suspension of corporate foreign currency accounts (FCAs) in support of the tumbling local dollar, did not help.

The RBZ forced all corporates to liquidate their FCAs by 21 November 1997 in a vain attempt to push at least US$160 million onto the local market and further stabilise the Zimdollar. Banks would only be allowed to hold US$5 million or 20% of their capital whichever was lower, while bureaux de change were allowed only US$500,000. Any amounts above that had to be sold on the market.

Exporters thus faced the real threat of losing access to their own forex for importing essential inputs. Heavy losses were reported for Delta, Meikles, Barclays, BAT, Capri Group, Border Timbers and Chemco; overall Z$4 billion was wiped off the value of quoted companies in that week.

Black Friday’s legacy remains.
Unprecedented inflation was experienced in the immediate aftermath of Black Friday, leading in January and October 1998 to price increases for maize, bread and fuel. The government reacted to the perceived threat by moving back into dirigiste territory: imposing a mid-1998 price freeze on staple goods, a late-1998 tariff on luxury imports.

Unhappiness with the economic situation saw the rise of trade union politics culminating in the formation of the first effective opposition party in nearly a decade. Some companies, already struggling due to the shrinkage imposed by ESAP, began to close although it was not until the hyperinflation of the 2000s that industrial production crashed.

Consequently, the informal sector bloomed beyond imagination to the extent that in the 1999-2000 fiscal year it was estimated by the World Bank to be 59.4% of GDP, the highest in Africa. In November 2000, the Confederation of Zimbabwean Industries (CZI) reported that at least 1,7 million people were being supported by the informal sector.
Many people chose to leave Zimbabwe before 2000, citing a lack of “opportunities,” and thus we see the beginnings of the significant diaspora whose remittances continue to underwrite the economy.

Black Friday irrevocably changed the Zimbabwean financial landscape, and has continued to influence socio-economic directions for more than twenty years.

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