In all the discussions about greater availability of cash and pay rises for civil servants and everyone else, there appears to be an assumption by the general public, and regrettably even by experts, that economic laws will not apply and that all these moves will produce positive results. This is not so.
Let us look at the 15 percent pay rise for civil servants, whom we agree are grossly underpaid and exploited since most of them have tertiary education and are doing essential work like teaching our children, looking after us when we are sick, policing our streets or helping our farmers grow more better quality crops. The percentage of the State payroll doing what most would consider to be “useless jobs” is very small.
Now this pay rise could be a very positive stimulus for the economy, or it could make the shortage of foreign exchange even worse. A lot depends on what the civil servants spend the extra money on. If they decide to buy more Zimbabwean food and drink, or use the money to buy Zimbabwean bricks, cement and timber to build a house, or in fact spend it largely on essentials and luxuries made in Zimbabwe from Zimbabwean raw materials then there is an extra boost for local industry and agriculture.
If they spend it on imported stuff, anything from foreign consumer goods to petrol and those Japanese second-hand cars, then the final result will be a moderate increase in the premium for unofficial US dollar banknotes and external funds.
And Zimbabwe will not win, nor will the civil servants or anyone else who sees the price of inessential foreign imports rise.
This is one reason why, over the years, there have been strong suggestions that the Government capitalises part of the emoluments we pay civil servants, by building them houses that they can occupy for rents that just cover the costs of maintenance, rates and utilities. This would boost standards of living while at the same time ensuring that the extra money went local; and by acquiring fixed assets the Government could even justify a modest percentage of extra borrowing.
Economic laws will also apply as more US banknotes or RBZ bond notes are made available at ATMs. As we and many others have noted cash is now a commodity in Zimbabwe, rather than a medium of exchange, with the exception on bond coins which do sterling work by allowing people to pay bus fares and buy cheap vegetables from vendors at a $1-$1 rate with transfer dollars.
Most US banknotes that enter Zimbabwe eventually leave Zimbabwe in someone’s pocket. This is why people pay extra for them when they are in short supply so that they can take money out of the country. So pumping more into the economy will cut the price, making inessential imports cheaper but not doing much else.
Bond notes are largely an intermediate step in the process of buying foreign bank notes, although they have their own market near our borders for foreigners wishing to arbitrage price differences for certain goods and who, understandably, do not wish to draw attention to themselves. They are also useful for people who do not want the sellers of some goods or services, such as drugs and sex, to know who they are; as an aside anyone who can figure out how to make an Ecocash transfer anonymous could probably dent that market.
So if more bond notes are pumped into circulation, all that will happen is that their value will drift down towards the value of a transfer dollar, and bring the moment closer where Zimbabwe has its de facto local currency with a dual exchange rate, a point we have almost reached if you think about it.
We can see this assumption that cash is a commodity, rather than a medium of exchange, in some of the erudite criticism of proposals to add another $400 million of cash to what is in circulation. Commentators state, matter of factually, that Zimbabwe has a monthly demand of $350 million for cash.
The assumption is obviously that this extra cash will not be used as a medium of exchange, being drawn from a bank by a consumer, spent on goods and services and then banked again by the provider of the goods and services. Instead there is an inbuilt assumption that all the extra cash will be removed from the banking system the second it is released.
And if the extra cash is made up of US notes then obviously that is the case, since these will rather soon be carried across a border. If enough are released to meet demand then we will return to the position where a transfer dollar and a US banknote are the same value, and there will be no market for banknotes as a commodity and no premium.
And if the extra cash is bond notes then the premium for bond will go down or even disappear and no one will bother queuing for cash since it will be cheaper and easier to use digital and mobile money, as we have all found out as we move into the 21st century, in fact leading the world in this regard.
As the RBZ well knows, the total of bond notes and bond coins now in circulation is probably more than enough for a circulating cash currency even if the transfer percentage drops from the 96 percent of all transactions it has reached. What stops “bonds” from being a real means of exchange is the curious hoarding of these notes, their use as an intermediate step in buying US dollar notes and the determination of the Reserve Bank never ever to print its way out of trouble ever again.
Once people start understanding that no economic, financial or monetary change can be isolated, then perhaps we can all start working out what the effects of any policy will be, and then try and design the changes so they boost standards of living of as many people as possible, rather than push Zimbabwe into a bigger economic mess.