Zimbabwe’s last two attempts to switch the allocation of foreign currency from fiat decisions to market forces – ESAP in the 1990s and dollarisation in 2009 – both failed for three main reasons: fiscal indiscipline allowing money supply to grow several times faster than GDP growth, greater pressure on forex markets by consumers rather than producers, and what appears a near insatiable desire by too many Zimbabweans for foreign consumer goods, especially luxury goods.
This time round, with Reserve Bank of Zimbabwe Governor Dr John Mangudya introducing an interbank market for forex earnings retained by exporters, around half our forex, we have to take steps that we can move forward, rather than go round and round in circles.
The prime killer of the last two attempts, fiscal indiscipline and runaway creation of money, has been firmly tackled. Finance and Economic Development Minister Prof Mthuli Ncube has shown a welcome fanaticism in imposing discipline. He, unlike his predecessors, and some of them knew what was needed, is backed by a President and Government prepared to stand firm against all pressures.
Indeed President E. D. Mnangagwa showed the new attitude when he announced himself the new taxes on fuel that killed smuggling, a fast-growing black market, incipient dollarization and a great deal of waste. Sending a signal that the man at the top was prepared to stand firm showed more than any rhetoric that Zimbabwe had switched from 37-years of buying short-term popularity at the expense of lasting development.
But, while the taps of money creation have been switched off, there is still a large lake, perhaps an inland sea, of money already created in the days of fiscal indiscipline. But the $9,4 billion in the RTGS banking system is not unmanageable. Dr Mangudya in his Monetary Policy Statement this week made it clear the RBZ would move aggressively to “sterilise liquidity”, mainly through converting some short-term Government debt to longer-term bonds and in using the RBZ’s powers to set statutory reserve requirements for banks.
Timing and sequencing these measures will be critical. Our feeling is that Dr Mangudya and Prof Ncube probably hoped to sterilise quite a bit of the excess liquidity before moving to the interbank forex market. But the price rises and fluctuations of the last few months – some legitimate corrections, some panic-stricken reactions to social media messages and some driven by greed – forced a change in sequencing. Long-term modest-interest bonds will not be attractive unless potential buyers are reasonably sure that prices will be stable, and to achieve that required bringing the parallel market under supervision and management. But as prices stabilise, or even fall, as a result the bond market needs to open.
Statutory reserve requirements will be tricky. In Zimbabwe many producers are undercapitalised. But far too high a proportion of the loan book for most banks comprises tens of thousands of modest loans to salaried customers. These are low-risk and the monthly payments are easy to collect, so they are profitable. But most of these loans are used to buy imported consumer goods, anything from a lounge suite, through televisions and stoves, to motor cars. A minority of these popular loans are productive, or at least potentially productive. Borrowing to build a house at least creates an asset, and buying a university education for a child at least promises that one day another productive tax-payer will be on the books.
We have suggested before, and repeat this again, that Dr Mangudya should vary reserve requirements on the basis of the make-up of the bank’s loan book. A bank with a high percentage of its loan book occupied by farmers, miners, industrialists, tourism operators and any exporter should have a lower requirement that one whose loan book is dominated by consumer loans or even shopkeepers.
But the monetary measures cannot alone cope with the fact that Zimbabwe is a nation of shoppers, rather than a nation of people who make things. Consumer demand for foreign currency could easily swamp the limited market and crowd out the producers who need to buy raw materials and production equipment. It is fairly easy to imagine that rich people in Borrowdale might pay more for forex to buy luxury German cars or scotch whisky than the farmer wanting fertiliser, the miner wanting spare parts, or the canner wanting cans to process local tomatoes can afford.
Added to this is a long tendency for consumers to want foreign goods rather than Zimbabwean made alternatives. So it is more likely that the Zimbabwean tomato canner might well be crowded out by the shopkeeper importing cans of Italian tomatoes.
There are a raft of fiscal and licensing measures that can be used to curb consumer demand and open space for producers. Prof Ncube, who as the fuel crisis showed is not adverse to using fiscal measures to fix markets, can vary his customs duties. Industry and Commerce Minister Mangaliso Ndlovu can manipulate his import-licence regime to cut consumer imports. Where trade pacts make these measures impossible or very difficult then there are options such as multiple-rate VAT or special excise duties, with rebates for local production. Even with international treaties Zimbabwe can claim temporary exemption because of US and European sanctions. Although the sanctions imposers claim they are targeted the collateral damage is high. This is a military term to describe what happens when you bomb the headquarters of your enemy’s leader; you kill a lot of civilians living nearby. They were not targeted but they are still dead. Sanctions are similar.
These fiscal and statutory measures do not destroy market forces, but they do push them in more desirable directions. The rich man wanting vintage whisky can still buy it or import it, it will just cost him a lot more; so the modified market forces will see him drink less.
Essentially the new interbank forex market will work well if consumer demand can be kept within bounds. The RBZ can do quite a bit, but success also requires fiscal measures in a co-ordinated programme that ensures demand matches supply at a price affordable by the real creators of wealth, the producers. Business organisations now need to be as clear on how to make the market work as they were in calling for its creation.