Zimbabwe: Policy Inconsistency Hurting Economy

analysis

The Reserve Bank of Zimbabwe (RBZ) reintroduced the Zimbabwean dollar and outlawed the use of multicurrencies on the local market on June 24 2019, despite widespread concerns that it would be futile to tinker with the currency issue before addressing fundamental economic issues.

It was also apparent that the introduction of the Zimdollar was rushed without proper considerations on the impact of removing the multi-currency regime on the viability of key economic sectors such as aviation, tourism, financial markets, insurance and pensions, mining, energy and other government institutions such as the Registrar-General.

Massive confusion ensued and the central bank has had to issue two exchange control directives so far, relaxing earlier conditions and exempting certain payments that can now be done in multi-currency. Even though the Zimdollar is now the legal tender, petroleum companies, chrome miners, non-governmental organisations (NGOs), embassies and multinational corporations operating locally can use foreign currencies for local transactions through the foreign currency accounts (FCAs). This also applies to payment of import duty for the importation of certain commodities classified as luxuries by the government.

A lot of exemptions were made and more are expected, especially in mining, tourism and public institutions that desperately need foreign currency to operate. Businesses in Victoria Falls have rejected the Zimdollar, just like some small to medium enterprises (SMEs) in automotive parts, equipment and pharmaceutical retailing have done.

There is no doubt that the local economy is partially dollarised and the situation is bound to get worse as local production plummets and inflation persists above the 175,66% recorded in June 2019.

Zimbabwe's Treasury demonetised the Zimdollar on June 12, 2015 and vowed never to introduce a local currency until local production had improved beyond 80% and key economic fundamentals aspects such as debt and government expenditure had been restructured. In February 2016, the introduction of the bond note was communicated as a solution to the cash crisis in the market.

The bond note was later introduced in November 2016 with a decreed exchange rate of 1:1 to the US dollar but its introduction did not address the communicated purpose. At that time, the authorities highlighted that a separate account for foreign currency was not needed by account holders.

However, in October 2018 the central bank gave local banks an ultimatum to separate the so-called US dollar accounts and FCAs. During this period up to June 2019, the government dismissed any talk of re-introducing the Zimbabwean dollar while Treasury and central bank authorities issued conflicting statements on monitory reform.

In February 2019, the RTGS became a currency with an official rate of 2,5 to US$1. In June 2019, the Zimbabwean dollar was introduced despite all economic fundamentals being in the negative. All these policy pronouncements have wiped value from personal and business savings, pension funds, local credit lines, financial assets and investments at each turn.

Apart from the regular central bank policy ultimatums, Zimbabwe's history is marred with policy inconsistency in almost every economic sector. From the heavy-handed implementation of indigenisation policy on selected commercial entities since 2008 and its overhaul in November 2018; introduction and removal of the STEM initiative in education; Awarding and cancellation of roads and infrastructure tenders; amalgamation of diamond mining entities by the previous government and re-licencing them individually in 2019; land expropriation and the frequent threats to seize selected farms by government officials today despite promises for protection of property rights; banning of imports for products manufactured locally through Statutory Instrument 64 of 2016 to suspending the regulations; back and forth on the alignment of various laws to the 2013 constitution; plans to trim the civil service in October 2018 to a somersault on the plan the following month; re-engaging the European Union, United States and Commonwealth with a push towards key reforms to announcements that the government is not desperate in its re-engagement process; and announcing a raft of austerity measures in October 2018 -- only to abandon ship less than one year into the policy before any positive results of the austerity programme show on the economy.

Policy inconsistencies and poor succession planning in government can write a voluminous book yet there are no lessons learnt from previous experiences. Yesteryear blunders are repeated while failed policies from years back are dusted and tabled as new policies without any due diligence on why they failed initially. Sound government policies are suspended not because of their demerits to the economy but for political reasons.

The authorities expect businesses and the market at large to adjust immediately and adopt the new policy direction without any considerations on the impact to economic production or financial losses.

Policy consistency is a fundamental piece to the economic puzzle, without which it becomes difficult to attract both domestic and foreign investment.

Zimbabwe's foreign direct investment inflows average US$350 million in the last 10 years against a Sadc regional average of US$1,2 billion. Despite the abundance of natural resources and massive opportunities in the local market, investors shy away from Zimbabwe and invest in countries that may have limited resources. There is a direct relationship between market confidence and policy consistency, thus the continued decline of the Zimbabwean dollar against major currencies can largely be explained by lack of confidence.

A severe confidence shortfall is costing Zimbabwe billions each year as large amounts of foreign currency are externalised to safe havens by local business people (including government officials). Exporters and other organisations in the economy are holding onto over US$1,1 billion in their foreign currency accounts despite calls to liquidate or trade the foreign currency on the interbank market. The market is simply not sure of the next policy pronouncement and hedging against losses through savings in the US dollar have become the norm. Investors adopt a wait-and-see approach, to the detriment of economic growth.

The government is a key player in the economy and its policies chart the path to economic progress, but an economy has various players in the value chain that derive utility from interconnected relationships to other sectors.

A major policy pronouncement in agriculture does not affect agricultural production alone but the entire economy.

The same can be said with all the central bank directives in the financial sector, announcements on petroleum and energy, salary adjustments in the civil service, prosecution of corruption cases, the upcoming fiscal budget review and privatisation of state enterprises and parastatals (SEPs) among other topical policies or government interventions at the present moment.

There is an urgent need to separate key institutions such as central bank operations (monitory policy) from political decisions. It is also vital for the government to consult key stakeholders and practice due diligence before announcing market defining policies today before changing direction tomorrow. A long-term view on economic policy allows for stable economic growth, employment creation, investment and business continuity.

Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe.

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