12 February 2018

Zimbabwe: Monetary Policy - the Persistent Cash Crisis and Absence of Fresh Thinking

Photo: Pixabay
(File photo).

The monetary policy statement (MPS) predicated on the fiction that the local bond note currency is worth the same as the international dollar must be interpreted with due circumspection, if not outright cynicism.

If the economy really is "open for business" - and Governor John Mangudya's presentation goes to some lengths to demonstrate that it is not - currency values should be determined by market forces, not Government diktat. Moreover, in an open, liberalized, market economy the bulk of Governor Mangudya's analysis and policies, indeed should be, would be redundant.

Dollarisation succeeded for a few years when the Government of National Unity was in office, but once Zanu-PF regained control of the levers of power, it embarked on a borrow and spend spree that, if the budget numbers are accurate, is set to continue.

In the 4 years to 2017 the government's share, including parastatals, of domestic credit, increased almost ten-fold from under 10% to 65%, while domestic debt surged from some $360 million in 2013 to over $6 billion. Having crowded out the private sector so comprehensively, the chosen solution as outlined in recent RBZ policy statements, is to raise funds externally and channel them into "priority" sectors selected by politicians and central bankers with little knowledge of the realities on the ground. Just how this command economy mentality morphs into one that is open for business remains to be seen.

Against this background and in the wake of a 75% increase in the money supply in the last two years and another 23% to come in 2018, Governor Mangudya's promise to use monetary policy to keep inflation within a 3% to 7% band is truly heroic. His chances of success are minimal, even with the help of intimidation by politicians and reliance on the Zimstat consumer price index as a meaningful measure of inflation, which very obviously it is not.

That dollarisation in Zimbabwe has passed its sell-by date is evident on several fronts. The most transparent market measure of currency over-valuation is the Old Mutual Implied Rate, calculated by comparing the gap between London or Johannesburg prices for OM shares at the official exchange rate, with the Harare valuation. At current prices this translates into an exchange rate of R7.3 to the dollar-in-Zimbabwe compared with an official exchange rate of R12.1. Small wonder then that Imara Stockbrokers in its commentary on the monetary policy statement (MPS) this week advises clients bringing money into Zimbabwe to do so via the OMIR mechanism at a premium of 65%.

The lesson from this -- as well as from parallel market transactions in so-called RTGS balances or electronic dollars and in cash deals where reportedly $100 purchases 150 in bond notes -- is that the current situation is not sustainable.

While abandoning talk of a switch to the rand in preference for a new local currency when "the fundamentals are met" the authorities are trying to stabilise the currency via a combination of still more offshore borrowing, import and capital controls and subsidies for exports and Diaspora remittances at a cost of $297 million between May 2016 and the end of last year.

This strategy is stuck in catch-22 territory in that to satisfy the fundamentals of a reduced budget deficit and three months import cover (about $2 billion) Zimbabwe must have a competitive exchange rate. But the devaluation needed to restore competitiveness depends on first meeting the fundamentals.

Nor is this the only problem. In the MPS, Governor Mangudya suggests a local currency backed either by gold or some form of currency board arrangement. This he said would mean "a mechanism that links the demand and supply of money to the balance of payments which is essential for convertibility and for the quick elimination of

imbalances within the economy."

Such fine sentiments are devoid of realism. At current prices it would take over 2 years to stockpile enough gold to back a new currency, reducing exports by a quarter in the process. In any event gold-backed currencies are a throwback to the past.

Above all, the suggestion that Zimbabwe is ready to adopt a hard exchange rate regime is fanciful, especially in the light of Governor Mangudya's admission that an extra $2 billion in government spending was funded by Treasury Bills and the RBZ overdraft. The small print in the budget papers shows that this is not about to change, with credit to government forecast to increase $1.9 billion (30%) during 2018. So much for monetary restraint dictated by balance-of-payments considerations!

A feature of the MPS is the absence of fresh thinking. Promises made in previous statements, such as an auction system for TBs and a return to open market operations to mop up excess liquidity are trotted out again. The implication is that in a crowded-out monetary sector, the solution is to convert one set of illiquid assets - transferable deposits in the RTGS system - into another, TBs.

That financial inclusion is mentioned at all in an economy where two-thirds of the population live in poverty yet expected to use mobile cash or debit cards to buy a 90c loaf of bread is worthy of Marie Antoinette's advice to the French peasantry: "Let them eat cake". On the grounds of sensitivity alone, the section on financial inclusion would have been better excluded.

One might have expected at least some discussion of the threat to the financial system posed by domestic debt denominated in US dollars. If this is added to the foreign debt, including the proposed $1.5 billion from the ubiquitous Afreximbank and the $1.9 billion increase in government's local borrowings this year, total US dollar debt will approximate 100% of GDP by end-2018.

Domestic debt is just the tip of the iceberg. If bank deposits in the RBZ and their holdings of TBs are adjusted for the 40% depreciation of the local currency, the haircut banks will have to take exceeds their total capital.

No matter. The MPS is winning applause from the commentariat, locked in the conviction that the consequences of explosive monetary growth, unmanageable fiscal deficits and US dollar debt, soaring poverty and unemployment, can somehow miraculously be cured by gain-without-pain re-engagement with the international community.

In this narrative, IMF warnings that, on average, it takes 10 years for a fragile economy to "shake off fragility" and estimates that it will take at least until 2030 for per capita incomes to return to their 1998 levels are brushed aside. But later this year or in 2019, Zimbabweans will have to come to terms with the consequences of decades of Zanu-PF mismanagement, one of which will be painful structural adjustment that will make the failed ESAP programme of 1991 look like a Sunday School picnic.

Tony Hawkins is co-author with Mark Simpson of: "The Primacy of Regime Survival: State Fragility and Economic Destruction in Zimbabwe" Palgrave-Macmillan (Forthcoming, May 2018).

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