Comment

What’s the secret weapon Gono?


AS Zimbabwe’s inflation soared to 360% this week the central bank appeared unfazed by such a damaging development that has blown away any prospects of economic recovery this year.


Reserve Bank governor Gideon Gono

was quoted in the state media on Wednesday as promising to deal decisively with the scourge because he has the ammunition to do so.


“We have a sufficient battery of policy instruments to deal with the resurgence,” said Gono.


So he has a secret weapon to fight inflation? Where has he been hiding it?


Gono’s military-speak about his mystery arsenal makes it even more confusing to tell where exactly the economy is headed now that all the other measures he has paraded since December 2003 have failed.


If indeed there is such a weapon to unleash on the country’s number one enemy, why has it not been deployed in the past to deal with the problem once and for all? There was no need to wait for inflation to head towards the 400% mark before rolling out his secret weapon because, as the International Monetary Fund said in its report released last week, the economy has “collapsed”.


Part of the reason for that, it said, was the Reserve Bank’s profligacy in throwing money at failing paraststals and the clean-up operation which no bank had any business getting involved in.


Inflation has effectively wiped out the purchasing power of savings held as paper assets. It has distorted the economy in favour of extreme consumption and hoarding of real assets, causing the monetary base, whether specie or hard currency, to flee the country. Zimbabwe has become anathema to investment, which calls for a speedy resolution of the crisis. The nation is waiting for a new strategy to be paraded and critiqued before it is put into action. Covert operations unleashed on the populace create unnecessary hostility and tensions between the Reserve Bank and stakeholders.


The greatest weapon to win the inflation war is commonality of purpose by all interested parties and ultimately ownership of the fight by those on the frontline. It would be futile for Gono to dispatch troops with a different cause to fight the inflation war. I am referring here to the carrot and stick approach, the hallmark of Gono’s monetary policy.


The stick has been wielded more often than the carrot has been offered. Businesses which have felt the punitive hand of the central bank more than they have tasted the benefits of reform have not applied themselves fully in the fight to achieve economic recovery.


We agree with Gono that the fight against inflation requires desperate measures to ensure the problem is not only wiped out but does not recur. Gono has introduced a form of shock therapy in his monetary policy reforms aimed at curtailing money supply growth, encourage exports to curtail imported inflaton and to stabilise the local currency. This worked to an extent before the general election when there was political will by the government to put things right, as a campaign gimmick.


Buoyed by this temporary trend, the central bank was projecting inflation would fall to between 20-35% by year-end. It was subsequently revised to 50-80% and then 265%.


This week Gono said double-digit figures would be achieved at the end of next year and single-digit inflation by the end of 2007. Does anyone still believe him?


For any form of therapy to work there should be full commitment by the political leadership. Shock therapy worked in post-war West Germany in the late 1940s. During 1947 and 1948, price controls and government support were withdrawn over a very short period. This had the effect of kickstarting the economy. Germany had previously had a highly authoritarian and interventionist fiscal regime.


Lately, Ecuador’s therapy involved placing the nation under a currency board which allowed the central bank to print only as much money as it had in foreign reserves. A currency board is a system by which a currency is convertible at a fixed exchange rate with another currency. This means that the currency is fully backed by foreign reserves.


Gono’s major problem when he rolls out his secret weapon is whether he will be allowed to make proper use of it. The government of President Mugabe, stuck in the groove of populist rhetoric, is averse to any drastic changes, especially those that will induce more pain in a restive populace. Signs of the government’s disinclination to radical changes were manifest when Gono decided to devalue the dollar and when he introduced a measure of dollarisation.


The fight is still on but Gono should know that his plans must pass the political test. In his January 2005 monetary policy statement, he said he would “not pursue policies that unduly undermine people’s livelihoods…” He has nothing to lose now because most people’s livelihoods have already been undermined.