For the last nine months Zimbabwe has been getting its fiscal and monetary policies right, yet in the ultimate of weird perplexities this is not reflected, or at least not reflected to anything like the extent that economic theory would suggest, in the market places.
Looking at what has been done right, we have a fairly good list:
The Government is running a primary budget surplus, that is it is paying for all recurrent expenditure out of tax income with a bit left over for the other stuff it needs to do, including running down its appalling inherited debts.
The money supply is remaining fairly constant, that is the number of RTGS dollars in existence is neither rising, thanks to the tight fiscal policy, nor falling, which at this stage of economic reform would see serious liquidity problems making production growth difficult.
Imports, especially of consumer goods, have been falling, largely because most Zimbabweans can no longer afford them rather than because local industry has become super efficient in providing substitutes, which gives us a clue of one serious weakness in our efforts to rise out of the financial mess the present Government inherited.
Foreign exchange reserves are, interestingly, quite high. While hard data is lacking there must be well over US$1 billion when you add all the bits together. But when you examine those reserves, it is obvious that a high fraction are in private hands, in the nostro accounts that exporters and primary producers of export goods are allowed to hold. That distribution gives another clue as to what is going on at the moment.
Then we have all the things that should not be happening, but which are.
First, and this is understandable if wrong and regrettable, is the unhappy memories all adult Zimbabweans have of the hyper-inflationary era, even if they were still children. Some hard lessons in economic survival were learned then and are now being applied in quite different circumstances.
Secondly there is a serious concentration of holdings of both RTGS dollars and US dollar holdings in nostro accounts. The economic upheaval of the 2000s saw a lot of losers and a few winners. This is a classic result, incidentally, of hyperinflation. Wealth is accumulated in very few hands as a tiny fraction of the rich get richer and the bulk of the population gets poorer. Inflation and Robin Hood are opposites. A glance at that list of the 10 richest Zimbabweans put out by Forbes Magazine fairly recently shows what we mean. Some on that list, just under half although including the number one, are on the list because they built businesses largely from scratch on virgin soil. The rest are there because they managed to buy up existing concerns without much extra wealth creation.
Thirdly we have two exchange markets, the formal interbank market backed by the authorities and then a small vendor market (black market) buying and selling US banknotes on the street, the dealers sitting on pavement stools. That vendor market, largely dealing with the funds sent by the diaspora through Western Union, is regarded as a benchmark; regrettably many Zimbabwean individuals have to access that market to buy things like medicine, largely because of the policy by near monopoly and cartel wholesalers of essential pharmaceuticals, as uncovered by our sister The Herald recently.
So we have as a fourth bad point the fact that holders of retained export earnings feel entitled to the same exchange rate as desperate people needing a life-saving drug are prepared to pay a street vendor and desperate business people are prepared to acquiesce in this to keep their companies afloat. That is worsened by the advent of the middlemen, arranging for a fee for exporters to buy stuff for importers. Banks were involved in this, although that is banned, but the friendships formed before the ban still continue. The desperation is made worse by the decline in primary production in the 2000s, and while secondary industry and retailing recovered with dollarisation, there was no investment in primary industry or even in essential services like public transport, something we don’t regret.
Fifthly, and this is where the good points and the bad points coincide, holders of retained export earnings in nostro accounts do not regard them primarily as earnings, although the revenues are properly accounted for as such in income and expenditure accounts. Instead the nostro holdings are seen as an asset, one that can be held just as one holds shares or immovable property. This is understandable, but again not implied by economic theory. So the bulk of our foreign exchange reserves are not seen as reserves, but rather as property to be preserved.
What we are in fact seeing is a classic bubble, and instead of a bubble in Dutch tulip bulbs, London luxury housing, dotcom shares or other odd items we have it in US dollar holdings. Zimbabwe set some records in the hyperinflation so perhaps we should not be over-surprised that we can generate another new chapter in an economic survey.
The problem is that all bubbles end in tears when the bubble bursts, and the forex bubble, without the underpinning of an irresponsible Government and rapid growth in money supply, will burst, sooner or later.
But it would be a lot better if it burst sooner. While the damage will be limited to the hoarders of foreign exchange, it could still have collateral damage as capital concentrations will be damaged and despite all the doubts we and others have over the concentration of capital in Zimbabwe, we do actually need investment in production, rather than just in consumption.
So what can the authorities do?
For a start they must continue with the rigorous policies they have been following, a policy of fiscal discipline, tight money and boosting primary production, such as this week’s announcement of the intention to double the wheat harvest.
But they also need to upgrade their data publicity. The Reserve Bank could easily give weekly and monthly figures of money supply, nostro totals and its own reserves. This would show that we are not sliding down some slippery slope. The Finance and Economic Development Ministry should work harder at giving regular basic monthly accounts of the tax revenue and Government expenditure. The easiest way of allaying fears of ordinary people, and of defeating the oddballs on social media, is to pump out facts. ZimStats should be empowered to give more regular news of GDP size, rather than just measure basic inflation, defined in Zimbabwe as the rise in the cost of living of a lower-income urban family.
And further measures are needed to make the interbank market work, that is to get exporters to use it rather than hoard currency or go through what amounts to a private sale, through paying someone else’s import bills for a price. We can think of two steps: one would be a ban on further bank loans to any person or entity with a nostro holding of more than a fixed number of days. If they want RTGS dollars to pay bills or buy other assets then let them sell their forex holdings.
Then the ban on those cosy bank-arranged exporter-importer deals needs to be extended so that while exporters can pay for their own imported requirements they cannot pay for someone else’s imports. All we have done so far is remove one set of arrangers. There are others outside the banking system. That admittedly puts in place a big brother peering over shoulders, but exporters might consider the other option available, the immediate launch of a Zimbabwean currency and the end of those nostro accounts, with all export earnings automatically entering the interbank pool as they arrive in the country. As we have warned before, while a steady progress to the local currency, ticking all the boxes as we go, might well be preferable to a big bang, the big bang is preferable to an avoidable economic implosion caused by a growing bubble.