When failure becomes impossible to hide

GOVERNMENT this week did exactly what the market had always expected, issuing a higher, $100 000 denomination bearer cheque, in response to ever rising inflation and, consequently, a looming currency shortage.

R>Misplaced fears by the authorities had been that higher denomination notes would exacerbate inflation, but this belief ignored the bigger factors in the inflation equation.

The government last year borrowed heavily from the central bank, mainly for grain imports against the backdrop of a poor harvest as well as for fuel imports, implying that cash from the central bank was used to buy foreign currency. Lots of cash was printed.

This year a similar pattern is emerging.

The Reserve Bank printed a whopping $21 trillion to purchase US dollars to repay IMF arrears to stave off the imminent severance of the country’s membership of the Bretton Woods institution.

Government has already spent its budget for the year, and has been borrowing heavily to finance the deficit, although Finance minister Herbert Murerwa is yet to present a supplementary budget to allow for deficit spending.

This represents a bigger appetite for cash by government, which is going to spend 60% more than originally budgeted for on civil servants’ salaries after hefty increases last month. Money-printing stokes money supply growth which in turn fuels inflation.

There was always apprehension that printing of higher denominations would betray failure to manage a faltering economy and stoke inflation by releasing huge sums of money into the hands of individuals.

There has always been a denial by government that the economy is in a deep crisis. But the issuing of bearer cheques, which are not legal tender as a recent court ruling established, gave away the lie by the authorities and awakened Zimbabweans to the realities of a deep-seated economic disaster caused by increased money supply growth.

During the inflation years of 1922 and 1923, Germany printed what was then termed Notgeld, or emergency money, in high denominations to deal with a crisis that had resulted in devaluation occurring faster than the logistics of issuing notes.

We are in a similar situation. We acknowledge the wisdom of firefighting adopted by government in dealing with the innate inflationary pressures in the economy, but this has not been out of a sincere admission of their failure to manage a once vibrant economy. We admit that Zimbabwe’s inflationary predicament is a factor of increased money supply, but this has been largely fuelled by fiscal profligacy while the public has been denied access to their bank deposits through administered shortages.

The view by government has been that allowing the public to have too much cash would promote parallel market activities, particularly the trading of foreign currency, which has become the only pricing indicator for industry and commerce because of shortages on the official foreign currency market.

The inflationary cycle has made it unattractive to hold the local currency when costs of goods and services go up almost everyday. What this means is that rather than saving, people are now making sure they spend their little incomes as fast as they can on goods.

The problem is compounded by the fact that there are serious shortages in the economy. Scarcity, by its nature, generates inflation, and this adds to a problem the government is already exacerbating through money printing.

Fuel is in very short supply, as is maize meal, the country’s staple food, as well as foreign currency, sugar and cooking oil.

It has therefore become rational that people quickly get their money out of banks so that they can transfer it into goods or assets.

Reserve Bank governor Gideon Gono’s announcement this week of the $100 000 bearer cheque represented a paradigm shift by government on the issue. Gono told journalists on Tuesday that an assessment of current denominations had revealed that they were no longer serving the intended purpose. “It is not the first and last time to see us introducing bearer cheques and we will not hesitate to introduce higher denominations,” Gono said, obviously going against the grain of political thinking.

In other words, people should have their money when they want it.

This is obviously inflationary as is government spending generally.

Zimbabwe’s hyperinflation can only be stopped once there is an admission that the government is the chief cause of the problem through its tax-and-spend habits, as well as its borrowing patterns. Only then can any meaningful economic and monetary reforms arrest the persistence of hyperinflation in the economy.

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