eBusiness Weekly
BusinessWeekly Last Word
Zimbabwe’s monetary and fiscal authorities seem to be good at strategy but bad at tactics as they continue tackling the economic fundamentals and clear up the mess the Second Republic inherited but at the same time react late to unexpected financial events.
A superb example of this is the 2019 Mid-Term Monetary Policy Statement: Return to Normalcy given by Reserve Bank of Zimbabwe Governor Dr John Mangudya exactly a week ago. This well-argued statement charts the progress made to mid-year and is optimistic that the worst of the effects of the required adjustments had been accommodated into a new, properly managed, fiscal and monetary system. And if it had been issued at the end of August it would have been a sound record of what was happening and what needed to happen. Unfortunately it was issued in the week when the Zimbabwe dollar, for reasons that are not yet apparent, started tanking, a process that has already seen prices moving upwards as manufacturers and suppliers start hedging over what is fairly obviously going to be a new spell of cost-push inflation driven by a falling exchange rate.
Regrettably Dr Mangudya did not address this, although the trend was already strongly apparent but before the true horror of this week. In fact the lack of reaction so far suggests that neither Dr Mangudya nor Finance and Economic Development Minister Professor Mthuli Ncube was expecting anything like what happened. Both the Supplementary Budget statement and the Monetary Policy Statement were expecting a modest amount of upheaval as reversing mispricing and the like were absorbed, but nothing like what happened.
At present no one knows the reason for the sudden rise in the value of US dollar on the Interbank market. The data in both the Budget and Monetary Policy Statements made it clear that the fundamentals were moving in the right direction, with the Treasury no longer using the RBZ to fund spending thanks to strong primary budget surpluses and so negligible growth in the money supply, and with the balance of payments moving rapidly away from the shocking negative balances of last year, and previous years. In fact, as Dr Mangudya labelled his statement, Zimbabwe has progressed significantly on its journey from voodoo economics towards the sort of sane and viable economics that all desire.
But since the Interbank rate is based on a market there is obviously either a decrease in the amount of forex on offer or a sudden surge in the amount of Zimbabwe dollars that importers are allocating to currency purchases or both. And it would be useful to first know what is happening and secondly what the fiscal and monetary authorities are doing or likely to do.
We have already seen both authorities having to move swiftly when previous unpredicted behaviour threatened Zimbabwe’s recovery. The last such intervention was in June when the multi-currency system was abruptly cancelled. It seems that particular intervention came earlier than planned, but at the same time, in retrospect, it could have been brought in even earlier, although at least everyone understood why it had to be introduced. Before that we had the sudden intervention of bringing in the RTGS dollar as a new currency. On the other side of Third Street we had the Treasury untangling the mispricing for all energy in a small set of sudden moves as unexpected crises arose.
Markets are not always as efficient as theoreticians expect. Sometimes users do not have full information. Sometimes there is deliberate manipulation. Sometimes rumour, or the sort of nonsense that “everyone knows” cause problems. Lemming behaviour, whereby people who know that what is happening is illogical still feel they need to follow the herd cannot be underestimated.
This latest assault on the exchange rate probably has multiple sources. Dr Mangudya’s statement suggests one. He looks at export earnings in two sections. In one there has been fall between mid last year and mid this year; in another he states earnings rose in the first few months of this year. It can be safely assumed his figures are accurate, but the two sets imply some serious fluctuations in export earnings and that causes trouble on forex markets in the absence of central reserves that can be used to iron these out.
Secondly, and several pundits have suggested this, agriculture could be a major source. The severe drought last season cut production significantly, with the cuts varying according to region and crop but still a significant global cut. And that means a fall in exports and a need to import more food, one stress. Secondly a serious co-ordinated effort has been mounted to procure inputs to take advantage of the better, although far from perfect, rains forecast for the coming season. Many of these inputs are imported or have a significant percentage of imported raw materials. That provides a second stress. Zimbabwe’s economy, historically, has seen some large swings mirroring rainfall patterns and until agriculture’s share of GDP falls, with rapid industrialisation, and until more farming is weather-proofed this will continue.
Thirdly we have the fact that moving tax bands, which came into effect with August pay transfers, and the needed rise in gross pay for civil servants plus some commercial workers, the total amount of disposable income for consumers did rise at the end of last month. This rise was less than the fall in purchasing power in the last nine months, but it was still a modest jump on what was available at the end of July. And while as Dr Mangudya noted there has been a desirable switch from imports to local goods, there is still foreign currency inputs in local production.
But whatever the reason the issue needs to be explained and addressed. The fiscal and monetary authorities have become rather good at using market forces to tame market excesses and need to do so again.
A second disturbing aspect of Dr Mangudya’s statement was his comment on cash. He acknowledges that there is no a market for bond notes and coins, with many possessors charging a premium to those who need them. His proposal was to dripfeed extra into the system. Unfortunately these drips will tend to end up, quite quickly, in the hands of those who already hoard cash and feed it slowly into the markets.
But we could have expected a more radical approach. Most people require notes and coins for two purposes: kombi fares and tuckshops. Reducing the requirements for cash would kill the market.
The quickest way of doing that would be to set a date, in the next few weeks, banning kombis from taking notes and coins for fares and instead enforce the tap card system already in use by Zupco. A small period of preparation is needed so kombi drivers can all be issued with the simple cheap card readers and card sellers organised. It is no use making tap cards for fares voluntary. The kombi industry has already rejected this. If there are not enough readers available soon, then it would also be possible to choose cities where they become compulsory in the first stage or even, at a push, routes that demand them.
The tuckshop problem is probably best tackled through Zimra. Most small shopkeepers demand cash to avoid tax and both tax avoidance and cash demands are ills we cannot keep tolerating.
Dr Mangudya was overly worried about rural people and the elderly needing cash. This is part of the mythology of modern Zimbabwe, and someone in his position should be able to distinguish between complaints and myths. High transport costs and cash shortages have already converted much of the rural economy to mobile money, something that should have been expected by anyone studying the Kenyan experience. And elderly people are far more adaptable than some believe, even if they need lessons from grandchildren. In fact there are a large number of elderly rural people in remote districts who are reliant on mobile money from their children and grandchildren and can now punch buttons with the best of us. Enforcing high levels of network reliability would do more to help them that trying to figure out how to get bags of coins into rural areas where they would be hoarded and sold at a mark-up.
