The Zimbabwean Supreme Court made a far-reaching and dare I say very stupid ruling yesterday. It’s a ruling that is likely to send the little capital we have or might have had running for cover. According to the Zimbabwean Supreme Court if you borrowed/lend someone $1 USD back in 2018 or before 22 February 2019 your debt can be settled by paying (or being paid if you are the lender) them back $0.042 ZWL.

That could be good news if you were the debtor. If you say, were given a loan of $100 000 USD on 21 February 2019 you can settle the debt by paying back $100 000 ZWL today. That translates to $4 200 USD. Even if you had kept the money under a mattress that would give you a tidy profit of 2200%!

Rates Cross the 24 mark as Supreme court makes ruling. That means $1 USD of debt can be paid back at 4.2 cents #MarketWatchZW https://t.co/dwZ8leKTzs
— Market Watch Zimbabwe (@MarketWatchZW) January 21, 2020

A lethal blow to the economy

Zimbabwe needs capital if the economy is to grow and right now the country desperately needs Foreign Direct Investment. Sure future investors are most likely not going to be affected by the law but they will still take note of the ruling. It means the government of Zimbabwe can and is willing to change the law to suit its needs and wiggle out of its debt obligations. To understand why this is bad consider this, even the United States or China powerful as they are do not do this. They pay their debts on time.

Not paying your debts means you will be downgraded in terms of your credit rating. If you credit rating is in the toilet no sane investor is going to come to your country no matter how you beg. The court’s ruling is an effective death knell to the Zimbabwean economy which is already in a free fall.

All businesses that made loans are in real danger of collapsing if this ruling is implemented depending on how exposed it is. If somebody owed you $100 000 and now they can just give you $4 200? It means you might not be able to pay wages or make new orders. It means you can no longer invest in new machinery. It might mean the very end of the lending businesses.

Given how rates are fluctuating: last year this time the rate was 1:1 between the greenback and the local dollar. Now it is 1:17 officially and 24 on the real market. Who can tell what can happen in that market? It means those who were generous with their capital are not going to be so generous. Crippling our economy.

What prompted this madness?

We can only speculate here but the court based it’s ruling on the the Zimbabwean dollar law passed using the Temporary presidential powers. That law had sections dealing with how debts were going to be converted into the new Zimbabwean dollar era. For political expediency it said debts would be converted 1:1.

Why? Well any other wording would have had Civil Servants up in arms demanding they be paid the current equivalent of what’s in their contracts. To cheat these contracts the law prescribed the 1:1 rate. The current ruling is just a side effect but its one that will please the government none the less. The government owed about $9 billion to private lenders. Now it owes then $9 billion ZWL. That is a massive 2 200% savings.