Money supply slashed in real terms

08 Mar, 2019 - 00:03 0 Views

eBusiness Weekly

Many businesses are still stumbling in their pricing policies and accounting procedures because they are not thinking straight and are not looking at economic fundamentals and are mixing up inflation, corporate exchange rates and free-funds exchange rates.

The monetary and fiscal authorities are being less draconian than they could well be, and which they are legally empowered to be, probably because they seek market corrections rather than trying to run the economy as dictators, a policy that usually creates massive inefficiencies not to mention opening doors to crony capitalism at best and outright corruption at worst.

But action to enforce a desired ban on charging Zimbabwean residents in US dollars on goods and services supplied in Zimbabwe now appears overdue.

At the heart of all the economic calculations must be the money supply. This has stabilised at around $10 billion RTGS dollars. But what is that worth? The cost of living has already risen more than 50 percent since the end of September last year with a modest rise expected for February as the new exchange rates came into effect for Reserve Bank dollars. But a 50 percent jump in cost of living means those RTGS 10 billion buys just two thirds of what almost the same supply bought six months ago, so in effect money supply is 33 percent lower in purchasing power with a bit more drop to be measured.

But a reasonable ballpark figure is that the RTGS 10 billion in the money supply – that is all the money in the banks plus the money in wallets, both digital and leather, plus the money in safes – can buy what $6 billion bought when the reforms started.

At the same time the new interbank rate of RTGS 2.5 to US$1 means that the US dollar value of that money supply has dropped 60 percent. In US dollar terms all the RTGS dollars in existence are worth just US$4 billion. And that is around the value of eight months of exports, rather than the 20 months when the Reserve Bank was selling at 1-1.

The gap between the two falls measures a number of things. First there were those inefficiencies in the Zimbabwean economy that all businesses were complaining about; then there were the currency value problems that potential exporters said were killing them.

The gap actually shows that the devaluation of the RTGS, the nearest thing we have to a local currency, was greater than the rise in the cost of living giving the normal devaluation benefit of helping exporters and cutting imports. That was an obvious required correction considering the balance of payments. And as already noted the new interbank rate is the average of the RTGS yields from exports that was obtained the day before the monetary policy statement when the Reserve Bank was buying its half at 1-1 and the exporters were valuing the sums they retained at around 4-1, and so is likely to remain stable.

The fiscal and monetary authorities have been upbeat that monthly inflation rates are going to fall quite quickly from next month, and that the new exchange rate is likely to be stable. Both predictions are built on the assumption that money supply will be very stable, and so the pressures of too many RTGS dollars chasing too few US dollars or too few goods will be absent. That in turn assumes the Government is going to continuing balancing its own budget, that is its expenditure will be in line with its tax income and that it will not be creating new money from nothing.

As the fiscal authority is the Minister of Finance and Economic Development, Professor Mthuli Ncube, who has shown a remarkable determination not to fund State spending by increasing money supply, and as he has been backed by a determined President E. D. Mnangagwa who has taken the political heat, this presumption has a lot going for it.

The rising parallel market rates before the monetary policy statement were a direct result of too many RTGS dollars chasing too few US dollars, and the same overloaded money supply meant that there too many RTGS dollars chasing too few goods, and especially imported goods. Our inflation is less classical because of consumption patterns and the bias towards imported consumer goods and is more closely related to exchange rates than is healthy.

But as both inflation and what amounts to a devaluation reduce the pressures from an overloaded money supply, then we move rapidly towards a balance. If no new money is created then pressures on prices and pressures on foreign currency have to reduce.  Economists always said the fundamental problem was the money supply; now it has been effectively and radically cut to levels that many thought were sustainable when doing their sums, the effects of the drastic overloaded supply should vanish.

This effective reduction in money supply, regardless of whether you calculate the reduction in terms of inflation or in terms of exchange rates, is something all businesses have to take into account when they examine their pricing policies. There are simply not enough RTGS dollars now available to sustain much more in the way of price rises, especially those by providers who try and tie their prices to a US dollar exchange rate.

Already some businesses are suffering because too few people can afford the non-essentials they are selling at the prices they are charging. Even when we come down to more essential goods, it has become obvious that most consumers are no longer following brands but instead of are following price. The cheapest brand is the one that sells. Stocks of the most expensive brand need a good dusting on the shelves a couple of times a week. This is fairly common now: those trying to sell in US dollars or who pegged their prices to the maximum black-market rate and are yet to reduce are starting to suffer. Their margins might be high but volumes are lower, and in some cases much lower.

Already there is a growing group of businesses that have adopted the normal policy of calculating costs and applying a fixed percentage mark-up. This has already seen some prices starting to fall, and as this group did not panic and pretend that everything had to be equated to an exchange rate, they have been creating good customer relations.

That in turn will serve them well as things normalise. People will remember who was fair and who was not. And those same businesses are inherently more profitable because when you are competing on price and basing those prices on costs, you are going to do your best to control those costs, not simply remark that such-and-such an input is not much in US dollars and let it ride.

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