Zimbabwe’s economy at the moment should be benefiting from what could be considered a classic if not complex and uneven devaluation.
At the base of both the devaluation and the inflation is the multi-step introduction over the last few months of a de facto local currency, the RTGS dollar, and the end of the pretence that we were continuing to use the US dollar for local requirements, a pretence that had become ever thinner once we thought we could create our own US dollars out of thin air.
The change has seen a number of adjustments. The first and most obvious is the end of parity between the US dollar and the RTGS dollar, an obvious development since the RTGS dollar money supply was significantly greater than what was justified by our US dollar earnings. So a new balance was created based on supply and demand.
That equivalent of a devaluation was concentrated into a very short period of time, rather being spread out over several years which is what would have happened had there been a continuing local currency. As money supply growth was let loose by a Government that should have known better, the growth was absorbed and hidden by a fiction that all the new money being created was in US dollars just as good as those printed by the US Federal Reserve, an obvious falsehood.
When the wheels came off that peculiar fiction everyone found out this was indeed a fiction. The RTGS dollars masquerading as US dollars were obviously no such thing. The resultant exchange rate correction, or rather the resultant concentration of close on a decade of exchange rate corrections in a few months, caused a massive devaluation, and that in turn triggered a burst of inflation, and a burst of inflation that occurred after the growth in money supply was suddenly stopped. It is unusual to have inflation after a serious economic reform and a balance budget, but that is because the inflation was the result of past sloppiness that had its effects suppressed.
But the stop, that is the determination of the new Minister of Finance and Economic Development, Prof Mthuli Ncube, to ensure the Government lived within its means, only spending what came in from taxes, came after a spurt in money supply growth fuelled by a disgraceful number of years of deficit budgeting and money printing.
But the high levels of inflation that have hit Zimbabwe from October last year are a temporary phenomenon, because they are not backed by rises in the money supply and so must run out of steam, but are in turn feeding in their own distortions into an economy that is otherwise becoming less tangled.
The distortion is the usual one, the phenomenon of the reverse Robin Hood; In a period of high inflation money moves from the poor to the rich. And the effects can be made worse depending on what the rich then spend that extra wealth on.
If they invest it in factories or farms or mines or something that generates exports or substitutes for imports then the side effects are not serious and might even be beneficial. Unfortunately, in Zimbabwe, the extra money is likely to be spent on imported consumer goods, anything from luxury cars to vintage whiskey, that add zero value to the economy but add extra pressure on the balance of payments.
Zimbabwe has seen a closed economy before, during UDI and the opening years of independence and, oddly enough, over much of the last decade since the collapse of the Zimbabwe dollar. These sort of economies work fairly well for a few years, and can indeed accelerate growth. But because of the distortions that then arise they eventually run out of steam and then the wheels come off.
But one curiosity that we have seen this time is the fact that the loss in value of the RTGS dollar through devaluation is greater than the loss in purchasing power through inflation. That imbalance is probably a direct result of the desperate desire for imported consumer goods in Zimbabwe, partly fuelled by the flow of wealth to the rich and partly by the banks being ready to lend anyone with a salary money at fairly low rates of interest with no questions asked, and those loans in turn being used to buy imported stuff.
However, the greater value loss through an effective devaluation than through loss of purchasing power has created a classic devaluation, one that makes imports more expensive, exports more saleable and puts pressure on consumers to buy more local goods and services and fewer imported products. And that in turn starts creating the conditions that Zimbabwe’s productive sectors have been screaming for over the years.
The distortions were so serious, especially in the exchange rate, as a result of the growth in money supply that the devaluation-led inflation in also serious. And what is worse the two are confused by many. But as business starts thinking things through and stops measuring inflation by the exchange rate, and as the fall in value of the RTGS slows and stops, simply because money supply now balances requirements, we should start seeing some serious progress towards a normal economy, a rare visitor to Zimbabwe.