By Tendai Biti
RESERVE Bank of Zimbabwe (RBZ) governor Gideon Gono is to be congratulated for bringing economics into the centre of public debate and for livening up what would otherwise be unbearably dull f
are that is churned out by ZTV.
It is a great pity that there is such a gap between his smoothly delivered rhetoric and the economic reality on the ground, and that the private sector has been bullied into giving sycophantic applause rather than informed criticism. In his latest performance, the governor went so far as to dub anyone who fails to give him their unquestioning support as lacking the adequate expertise to analyse the policy regime and come to the conclusion that Zimbabwe is on what he terms the “full economic recovery route”.
This sort of outburst is symptomatic of the governor himself losing confidence as he tries to contend with the increasingly evident contradictions in his policies. As any professional economist would tell him, indeed any first-year economics student, in the four core areas of responsibility of a central bank, Gono’s approach has exacerbated rather than relieved the underlying problems.
These four areas are: supervision of the banking sector; management of the money supply; interest rates; and the exchange rate.
The remaining dozens of topics dealt with in his latest monetary policy statement are not normally the preserve of a central bank, but perhaps serve the function of obfuscating the failings of the RBZ in its core areas of responsibility.
If the statements in his maiden monetary policy statement (MPS) in December 2003 are anything to go by, Gono started in a much more promising fashion. Let us take each of the four areas in turn and evaluate what he has done in relation to what he said he would do in his December speech.
Supervision of banks
“In order to safeguard the stability and soundness of the financial system, and minimise distortions, the bank’s supervisory role has had to, and will continue to be, strengthened . . . The message that this conveys to the market is that the curtain has been drawn against the era for the proliferation of weak, poorly managed financial institutions dependent on cheap and unlimited central bank credit.” (December MPS, Pages 35-36).
When he took over at the RBZ last December, Gono was rightly concerned about the state of the banking sector. But instead of giving the banks time to adjust, he precipitated a much greater crisis than was necessary.
He did this by starving the market of liquidity, driving interest rates by the end of 2003 to as high as 1 000%. This caused a number of poorly run banking institutions to default and other well-run banks to be caught in the crossfire when the cheque clearing system went into gridlock.
In January 2004, Gono bailed out the ailing institutions through the Troubled Banks Fund, giving them three months to sort themselves out. Inevitably, however, when the three months were up, many of the problems were still there and in the meantime the Troubled Banks loans plus interest had ballooned into hitherto unimaginable sums.
Whereas the governor expressed horror in his December statement about the level of public domestic debt ($607 billion on December 5 – MPS, Page 46), by July just one of the private defaulting banks owed more than this amount to the RBZ. So much, as the quote above would have it, for the end of the “era for the proliferation of weak, poorly managed financial institutions dependent on cheap and unlimited central bank credit”.
The banking crisis is by no means over. Further negative economic fallout and appropriation of public funds for dubious support to private institutions is in store for later in the year.
“It is critical that fiscal prudence, as intended in the budget, be complemented by a tight monetary policy. To this end, the bank will aim to contain money supply (M3) growth from levels around 500% by the end of this year, to below 200% by December, 2004.” (December MPS, Page 8).
Under Gono’s stewardship, the money supply was dramatically augmented in the first half of 2004 not just by the injection of hundreds of billions of dollars for the troubled banks but by $1,700 billion of “productive sector” loans attracting a highly subsidised interest rate of 30% (recently raised to 50% – figures from July MPS, Page 83). The net result, as reported in the July MPS, has been a very dramatic increase in the money supply, albeit that the rate has been declining from 490% in January to 400% in May (July MPS, Page 72).
The increase in reserve money, which is a particularly important indicator of future inflation, between December 2003 and May 2004 was already over the target he had set for the entire year of 200%. On a year-to-year basis, between May 2003 and May 2004 reserve money increased by a staggering 875%.
“Pursue a dual interest rate policy which, on one hand, seeks to encourage economic growth, while on the other, fight inflation through discouraging speculative and consumption borrowing. In this regard, interest rates on consumption, speculative and other non-productive activities will attract unsubsidised market-related rates.” (December MPS, Page 19).
A dual interest rate policy is simply not consistent with a commitment to what the governor characterises as his number-one goal, which is reducing inflation. As the governor well knows from his time as a banker, money is fungible.
Providing $1,700 billion at 30% or later 50% frees up money elsewhere to be used for “consumption, speculative and other non-productive activities”. The increasingly intrusive attempts to control the use of the “productive sector” funds are inherently futile.
As the governor rightly said back in December, “we need to show sustained discipline and commitment to the programmes that we undertake, and resist the temptation for policy reversals in the face of the inevitable pain of adjustment.” (December MPS, Page 50). But his interest rate policy has been anything but predictable.
Interest rates in the money market have been characterised by extreme volatility, veering from rates well above inflation to sustained periods of nominal interest rates well below 100% with inflation of the order of 400%.
Negative real interest rates provoke dis-saving, excess consumption, inflationary pressures and speculation. Evidence of the latest bout of such behaviour is the speculative mini bull-run on the stock exchange in June-July.
On interest rates, as in other crucial policy areas, Gono finds himself between a rock and a hard place. He knows that positive real interest rates are needed to conquer inflation and restore a coherent incentive structure in the economy.
But he also knows that paying real interest rates on the national debt would blow the budget out of the water. Despite claims of budgetary balance from the Ministry of Finance, under the present ill-conceived policies, domestic debt has mushroomed from $603 billion in December 2003 to $2,040 billion on July 23 2004 (RBZ website – domestic debt figure not mentioned in the July MPS).
The non-market solution that has been implemented is to compulsorily appropriate any liquidity surpluses of the banks and put these into Special Treasury Bills at rates of interest determined by fiat by the RBZ. This creates a new form of distortion which down the line will have further adverse economic consequences.
“We seek role prominence, in the area of relative price stability at home, and the preservation of the value of the Zimbabwe dollar relative to that of other currencies. In this regard, we will pursue policies that fight inflation and stabilise our exchange rate.” (December MPS, Page 2).
At the time of the announcement of the controlled foreign exchange auction, the MDC expressed alarm at the idea of control, continued taxation of exporters through the 25% surrender requirement and the orientation to stabilising the exchange rate (as presaged in the statement above) rather than to ensuring export competitiveness.
Our worst fears have been justified. The controlled auction has de facto been used to re-impose a system of import control more stringent than existed in the 1970s or 1980s. At the same time, the exchange rate has been systematically overvalued to an extent that has, by July 2004, destroyed the incentive to export in almost all sectors.
Inflation is an intermediate economic objective – the real goal is to create jobs and increase real incomes for Zimbabweans. Thus the economy will only have “turned the corner” when sustainable economic growth is achieved.
Regrettably, that prospect becomes more and more difficult every day that Zanu PF remains in power. This is not just because of the contradictions in the macro-economic policies and the resultant contraction of export and import substituting activities, but because of fundamental flaws in the environment.
Recovery is ultimately a question of confidence and this is impossible in a situation where, to take Kondozi as one of the most egregious examples, an indigenously owned business with Export Processing Zone status is nonetheless hijacked by rapacious members of the political establishment.
It is also impossible for international support to be resumed under this government – any other reading of the recent surprisingly harsh criticisms of the President Robert Mugabe regime by the IMF is just wishful thinking.
Resumption of international support to Zimbabwe would require a legitimate government to be in place, willing to restore the rule of law in all its aspects and to formulate and implement a comprehensive economic recovery programme, including negotiating bridging loans to clear the accumulated foreign currency arrears – which by now amount to well over a year’s export revenues.
* Tendai Biti is the MDC’s economic affairs spokesman.