RESERVE Bank of Zimbabwe governor Gideon Gono, currently President Robert Mugabe’s point man on the economy, last week presented his monetary policy review statement that is unlikely to put brakes on a slide that is taking the whole country down the
path of poverty.
Gono’s review was widely expected to provide relief to a restless population battered by the long-running political and economic crisis.
The country anxiously awaited the policy — a macroeconomic concept of managing money supply (monetary aggregates or stock) and velocity in the economy — hoping Gono would provide a panacea, especially in view of his recent achievements in stabilising inflation.
The anxiety was heightened by the fact that Zimbabwe’s sea of troubles, which had temporarily subsided last year, courtesy of Gono’s policy interventions, had come back in full flood after March’s disputed general election.
Gono faced an unenviable task. Macroeconomic fundamentals, interest, exchange, and inflation rates, were badly skewed and needed realignment.
Interests rates, the main instrument of monetary policy, were too high for debt-ridden businesses to borrow, but at the same time in negative territory, defeating efforts to combat inflation.
The exchange rate was also misaligned as the ailing Zimbabwe dollar was overvalued by over 300%. Devaluation, which does not work unless it is accompanied by a package of other economic measures, was inevitable due to the huge gap in the balance-of-payments position.
Monetarists, Chicago School economists as they are also known, say if a currency is overvalued it prices goods out of markets, which is damaging to exporters, and widens the trade deficit. It can also be inflationary, just like an undervalued currency.
Gono also had to deal with inflation, which despite falling from a record peak of 622,8% in January last year to 123% in March, had surged to 129,1% last month.
Irrepressible inflationary pressures were bubbling under the surface due to increased money supply and a wave of wage hikes unmatched by production before the last election.
Money supply grew 222,6% last year and continues to grow at an alarming rate, showing a high velocity of fiat money. The monetarist doctrine says money supply expansion in excess of real economic growth debases the value of the currency and fuels exchange rate instability.
There were also shortages of foreign currency, food, fuel, electricity and basic commodities. Captains of industry had warned that more companies faced closure and poverty was worsening against a background of rising unemployment.
The fiscal policy, through which government influences the economy via the budget, especially taxation and resource allocations, was in disarray. There can be no monetary policy to talk about if there is a collapse of fiscal policy.
The budget deficit that reached an unprecedented 25% of gross domestic product (GDP) in 2003, was too high. Zimbabwe’s economy, one of the fastest shrinking in the world, contracted by a cumulative 30% of real GDP in the past five years.
Gono was thus expected to adopt bold measures — not shock therapy — to put the economy on a sound footing.
Gono increased secured interest rates to 160%, from 95% and unsecured lending rates from 105% to 170% per annum. Concessionary lending rates for exporters were set at 5%, from 50%, and for agriculture at 20% per annum.
GDP growth was revised from a maximum of 5% to 2,5% but the question is how does an economy grow when all its major sectors are declining?
There were incentives for gold, tobacco and cotton. In a serious indictment of the failed the land reform exercise, Gono proposed “command agriculture” and appealed for a return of evicted “specialist” white farmers to revive a sector wrecked by a chaotic land redistribution programme.
In another move, Gono devalued the local currency by a negligible 45%, from US$1: $6 200 to US$1: $9 000, saying he would not legitimise “ridiculous exchange rates” ruling the “iniquitous parallel market”.
Observers described Gono’s politically-determined exchange rate as ineffectual insofar as it has no relationship with the prevailing market situation.
Although Gono was well intentioned and actually did his best under terrible conditions, his measures were in the final analysis piecemeal and woefully inadequate to make a significant difference to the state of the economy.
Admittedly, Gono is operating within severe political constraints. But people assume that when Gono came in he understood those realities and knew how he would negotiate his way on critical issues.
In the late 1980s in the US, Paul Volcker was succeeded by the current Federal Reserve governor Alan Greenspan, a leading monetarist. Greenspan’s firm handling of monetary policy in the run up to the 1991 presidential election amid an economic recession, was widely criticised from the American right as being excessively tight, but he stood his ground, costing George H W Bush (Senior) re-election.
When Bill Clinton came into office he reappointed Greenspan, and kept him as a core member of his economic team. Greenspan while he remained fundamentally monetarist in orientation, argued that doctrinaire application of theory was insufficiently flexible for central banks to meet emerging situations, especially those like the 1997 Asian financial crisis.
But in Zimbabwe Gono cannot stand up to Mugabe and his incompetent regime which appears dangerously out of touch with the practicalities of modern economics. This is why he often comes up with half measures, especially on devaluation.
Out of desperation, Gono last
week instigated a crackdown on black market dealers and hotels, claiming they were hoarding foreign currency. By mid-week at least 10 000 people had been arrested in a vicious drive to crush the black market economy, a symptom of a deep-seated economic malaise.
However, observes say the crackdown — which has political overtones — is pointless and bound to fail because the shortages, especially of foreign currency and basic commodities, are market conditions stemming out of a disequilibrium between demand and supply.
Instead of arresting black market merchants who are creatures of economic collapse, Gono should be arresting inflation and the broad economic freefall.
To further advertise his exasperation, Gono, who spoke in an emotional and aggressive tone, proposed building more jails to lock up underworld dealers.
Blaming “indiscipline in the economy”, foreigners, and parallel market dealers for failure to meet policy targets is unhelpful. Excuses bordering on threats and xenophobia cannot achieve economic recovery.
What Gono needs to understand is rent-seeking behaviour is an indication of the breakdown of political and economic structures. He also needs to understand that there can be no sustainable economic recovery without fundamental political reforms or a negotiated political settlement to the current crisis.
This is where the crux of the matter lies. Everything else, strictly speaking, is secondary.