Zimdollar opens the route to growth

12 Jun, 2020 - 02:06 0 Views
Zimdollar opens the route to growth Professor Mthuli Ncube

eBusiness Weekly

There is still continuous pressure for the redollarisation of the economy, with last week some Parliamentarians joining the fray, if in a half-hearted way.

Yet it is obvious that few pressing this point have thought through the implications, including a serious downturn in the economy as they look on the just the upside, a stable currency immediately, and ignore the downside, a serious shortage of US dollars, lower standards of living and, this time, a Government unwilling to pretend that it can print US dollars down at Fidelity.

Finance and Economic Development Minister Professor Mthuli Ncube outlined two of the major problems when he addressed the Parliamentary portfolio committee dealing with finance.

For a start, he estimated that 80 percent of Zimbabweans do not have access, or at least regular access, to US dollars.

This is not just a social problem, but also an economic problem. The social problem is obvious: How are these people going to buy food. The Government does not have a pile of US dollars to dish out in social security payments and it would take months for a dollarised economy to start feeding some tax money into the Treasury coffers.

But the economic problem is significantly worse. Those who remember the collapse of the old Zimbabwe dollar and the emergency dollarisation in 2008 may well remember just how little the average person had.

Even business managers were being paid in the low hundreds a month and this was in a situation where Diaspora remittances were fairly high, coming from growing and flush economies.

So demand for goods and services was very low. Admittedly, local production by this stage was largely shot after that decade of hyperinflation, but even so was pushed down even further by the purchasing power problem.

The emergency move did then see the economy bottom out and start growing, but the growth was led by importers and largely saw South African manufacturers getting what little extra economic activity was available, a move that helped consumers but hardly boosted production.

The major complaints at this time were the serious shortage of liquidity, which meant interest rates were seriously positive and very high and wages and salaries were very low. This was tolerable because the Zimbabwe dollar had totally collapsed. So any economic activity was in effect growth.

But then more serious complaints came through. Manufacturers were continuously complaining about the low levels of capacity utilisation, being priced largely out of a market where low output and high interest rates made their products very expensive compared to foreigners who had all the advantages of spreading their overheads over huge volumes.

Even at this early stage there was pressure to switch to the rand as the unit of account, something impossible for any Government, especially the coalition in power at the time, to even think about considering the public pressures. The same pressures, combined with the low wages, meant that restrictions on imports were politically impossible. Raising prices to get manufacturing back on its feet was simply not on.

Liquidity started growing, largely led by those positive interest rates that were, in effect, creating new money although this was not backed by any growth in the supply of US dollars. The Government then started its old bad habit of borrowing, creating more money that was not backed. This could happen because the bulk of money in circulation in Zimbabwe was used in Zimbabwe, so what amounted to quantitative easing worked since no one was willing to give the rug a sharp pull and bring what amounted to a house of cards down.

Some Government intervention on customs duties gave a little protection, but not much and it required in the end a legal change, removing most consumer imports from the open general import licence to have any effect. But this, combined with the laudable efforts of many manufacturers to invest in new equipment, simply increased the percentage of Zimbabwean goods on the shelves.

Exports of manufactured products were basically close to zero since they were so expensive. Zambian products started joining South African goods on the shelves, because they were cheaper despite the import duties and the import restrictions could not really be enforced effectively.

Calls for switching to the rand continued to grow since the rand was falling against the US dollar making imports ever cheaper and exports, in the markets that counted in neighbouring countries, even pricier.

And the Government kept printing new money, pretending that these were real US dollars. These were largely used to meet the growing State payrolls, because the low salaries were a political problem. The system could continue to absorb these fake dollars because of the size of the internal economy but the wiser economic commentators were continually warning about the sustainability of the measures. No one wanted to listen.

Which led to the second major problem outlined by Prof Ncube last week: the total lack of growth. Once the immediate demand was met after the end of hyperinflation there was little opportunity to increase production since Zimbabwean goods and services were grossly overpriced in a strong currency by developing world standards. So not only were prices higher in Zimbabwe, but no one out there wanted to buy our stuff.

Then the wheels came off, quite suddenly. This occurred when the local economy could no longer absorb the fake US dollars being created. At this tipping point there was a sudden shortage of real US dollars needed for imports and conversions between the fake dollars and the real dollars were no longer automatic.

The Reserve Bank of Zimbabwe kept the wheels turning, slowly, by assuming ever more power to allocate foreign currency, that is the real US dollars, but could do little to stop the fake dollars already in existence from circulating and zero to convert these to real dollars. The advent of the Second Republic did change the system, by stopping the Government from printing ever more fake dollars, but there were so many now swimming in the pool that the damage had been done. They were there.

Hence the move to the Zimbabwe dollar, the opening of forex markets and the problems we face now. At the centre is this assumption by too many Zimbabweans that redollarisation will solve the mess.


If we redollarise then all those Zimbabwean dollars in bank accounts will have to be destroyed, not converted but destroyed, since there are no US dollars to back them. So we start again from scratch. And this time it is harder. For a start the world economy is in recession so diaspora remittances are not flowing in so fast. Secondly the economy cannot grow since we cannot export anything beyond raw materials and those earnings have to be earmarked for essential imports, food and fuel.

Incomes will be very low, since there is no real activity to back pay rises and this time the Government is not going to print more so we can all pretend that a fake US dollar is a real dollar.

So we end up poor, we end up with a stagnant economy, and we end up with everything stable but without hope.

The actual policy, the phased introduction of markets, still leaves us poor, as we do not have the real wealth to back our currency at high levels considering how many Zimbabwe dollars were created. But at the same time growth is possible, starting with import substitution again and this time our goods are cheaper than those of our neighbours. So we can start exporting, just as the Zambians are doing.

Either course leaves us poor, but we cannot pretend we can borrow or print our way to wealth. We have to produce, cerate real wealth not fake bank accounts, to do that. So the Minister is correct, redollarisation will not work any miracles, just lock us in poverty as we distribute a fixed number of real US dollars among the population and with no growth in that number.

Using our own currency still means we are poor, as the local dollar supply has to be divided by the real dollars to get an exchange rate, in very simple terms, but at least our local costs are now low and so we can compete in local markets with imports, so long as there is at least a modest duty, and can under price in foreign markets, even if they retain duties.

So we start poor, but can grow rather than continually staying poor or going through a year or two or pretend wealth while waiting for the next collapse.

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