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Barman Calls Last Round

THIS year is a difficult year for everyone around the world and of course much more difficult for Zimbabweans.

The shocking confessions from Bernard Madoff and Ramalinga Raju that preceded 2009 were ominous signs of the great belt tightening to come, and here we are, tightening belts that in fact need loosening as further tightening will snap the same belt that needs to keep the trousers in position.

We have entered a phase where for many developed economies, monetary policy is less likely to be effective going forward as interest rates near zero, and the craze of fiscal policy is visibly taking over.

This is a pleasant year for central bank governors to take an early holiday at the beginning of the year, one that is likely to be much longer than they desire especially for the US Fed’s Ben Bernanke who has not been long in the office. 

But since this is one man who believes so much in fiscal stimulus in fighting a deflation, hopefully he will find more consultancy work from the treasury than from the Fed.

And of course our own central bank governor can equally join the central banker governors around the world.

With a Zimbabwean economy that has picked an unstoppable dollarisation wave, how do we leverage on monetary policy when that same monetary policy is now hardly effective in the US where the dollar originates?

No one should query if the RBZ governor decides to go on an open-ended leave between now and 2010.

Mervyn King, the governor of the Bank of England, should be more remorseful, having sent interest rates to their lowest since 1694, more than four centuries ago. And for the first time he should be feeling less powerful and idle. At least the Japanese have been there before and appreciate how the central bank governor can go AWOL for over one-and-a-half years with interest rates at zero.

The monetary policy levers are just no longer useful, and despite the massive cuts in interest rates around the big economies, credit can’t just flow into the deficit areas and the major global buzzword now is ‘bailout’.  

The world has come to self-correction. After taking cheap beer the whole night, the global economy could not afford to avoid the toilet for too long. And today many countries still queue to relieve the excesses in their system. 

The binge, emanating from cheap credit that drove household debt to disposable income to dizzying heights of as much as 158% in December 2006 for Australia, has eroded the business confidence and no barman wants to sell beer to anyone now, at least on credit.

And that is the big challenge facing the addicts, the bankrupt consumer and cashless corporate notwithstanding huge injections being pumped into the financial system around the world.

From the negativity flowing around the world on lay-offs and more bailouts needed, the barmen are less likely to be selling beer to anyone, even though the manufacturers have delivered it free to their warehouses.

Zimbabwe had its own cheap beer for years, and when the morning of relieving the system came, it came with pain. At a time the global economy ran on cheap credit, Zimbabwe ran on its own free flow of not only cheap credit, but also free handouts.

There is a big factor of consumer and social protectionism that the government ran with for a long time through price controls that has come to haunt the very same people that were meant to benefit from it.

Who does not remember the cheap fuel of 2003-2004? I remember one Friday afternoon driving to Botswana, some 700km away just because I had nothing interesting to do in Harare!

Who cannot remember speaking on the phone for three-five hours on a daily basis (peak period) until just before January 2009 only because they had nothing to do and could afford a US$ to pay the bill at the end of the month?  Does anyone care to switch off lights or geysers as they retire to bed?

The cheapest rates for electricity and water are arguably found in Zimbabwe, so is vehicle licensing and road usage.

Government policy, at a time the budget deficit has been soaring to over 100% of GDP (after including quasi-fiscal activities of the RBZ), made disastrous policies in consumer protectionism without sufficient funding, the consequence of what we see today in failed physical capital preservation.

The correction is coming slowly through dollarisation, although there is massive resistance now because the same people the government sought to protect are now so vulnerable that they cannot be left alone to meet the market price for goods and services.

And an intervention is desperately needed in the form of a stimulus fiscal package, a package that unfortunately is beyond the reach of the government alone without engaging the international community and donors.

The previous Z$-related stimulus packages have failed because of the obvious reasons that the economy is highly incapacitated on the part of physical capital and foreign currency, which basically is the lynchpin in addressing the critical supply side of the economy.

Is it not sad that Zimbabwe is now a province of South Africa? Many producers of goods in South Africa count Zimbabwe as their domestic market, and the productive sector in Zimbabwe that used to provide the jobs and contribute to government revenue has given in to years of price controls and administrative distortions.

The many jobless and socially vulnerable Zimbabweans in the rural areas are now defenceless in the face of the noble concept of basic sustainable market discipline of paying the right prices for goods and services via dollarisation.

They now need more temporary cushion than they ever did, and unfortunately it’s no longer tenable. The state cannot print US dollars for subsidies as the Z$’s rejection hastens.

The options are very limited, but still they exist. The political stalemate has created a lot of apprehension among potential guarantors to the recovery process.

But the economy cannot stop because of the politics, and the government has the right to unlock the gridlocks, only of course if it gets the courage to shrug off the heavy tag of policy inconsistency and unpredictability that has shredded its credibility.

It’s clear the dollarising economy is creating huge suffering to the majority because over 98% of the workforce earns in the local currency that is not meaningfully acceptable even in the rural areas where everything one intends to buy starts at US$1.

With 80% of people estimated to be living in the rural areas and their traditional breadwinners in towns where there are now unemployed, the situation is even more dire. But a government should not give up on its people.

The Americans are a proud people that are creating huge stimulus packages to fend off a recession. You want to meet a proud nation, meet the Americans!

We have had a recession since 1999, and have tried everything and failed to kick start economy, from the misleading price controls to the productive sector bailouts. What we have not done, that which will raise the economy, is giving the right market impetus on pricing and access to international lines of credit.

The former is inevitable with dollarisation. The global market has dried out, and money cannot flow anymore. The barmen are not as friendly. 

If we are not careful, the pricing reform through dollarisation is benefiting more South African producers who have already been benefiting from a wider uncontested market in Zimbabwe, and of course as well from the depressed wage rate emanating from the large pool of Zimbabwean migrants that stream to South Africa every day.

That’s probably the reason why the South African central bank is not worried much about easing monetary policy — because there is a huge market that is unresponsive to monetary policy in Zimbabwe, Zambia and Botswana.

Considering Zimbabwe has joined Botswana and Zambia as a “domestic market” for South Africa produced goods, Tito Mboweni can still afford to give strong support to the shaky rand through the interest rate lever without worrying much about stimulating consumer demand which is taken as given.

The government has one last shot to kick-start the recovery. And that is the disposal of assets to generate foreign currency and inject spending power into the civil servants, who in turn, because of their numbers, will turn the creaky wheels of the economic recovery process.  Mobile service providers are now charging in foreign currency and Net*One can easily go under the hammer. There is nothing strategic about it.

It’s unlike Zesa, PTC or Air Zimbabwe. This is the best time to sell the government stake in Hwange when the demand for power and coking coal is highest due to the regional electricity shortages.

We have precious minerals under the state’s claim in coal, uranium and diamonds. There is no strategic value in these when they lie in the ground and prices continue to plummet and a generation suffers under the worst ever inflation in the world since 2000. After all, we are all Zimbabwean.

Brains Muchemwa is a local economist  


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