The debate around the future of the multi-currency regime is a polarised one. On the one hand are the pessimists who believe we should prepare now for a world of worsening liquidity challenges.
By Chris Mugaga
On the other are the optimists who see the current challenges within global foreign exchange markets as a mere blip in a long-term trend of growing export values and currency realignment, which will create a level field for the adoption of a typical currency union with the rand mooted as the anchor currency given South Africa’s dominant economic stature. But neither of these outcomes is predetermined, and neither perspective is entirely new.
Many of the challenges and policy interventions we are seeing today have occurred in some way, shape or form before.
Since the passage of the Unilateral Declaration of Independence (UDI) on November 11 1965, government has been hamstrung by foreign exchange shortages, which saw the Ian Smith government taking an import-substitution model of industrialisation.
The liquidity crisis we are currently experiencing has come mostly in the form of cash (foreign currency) shortages; the question could be whether this is synonymous with African economies .
Nigeria comes to mind easily. Regardless of its rich oil reserves, the West African nation continues to grapple with foreign exchange shortages which have seen not only the Muhammadu Buhari-led government, but also his predecessors using the allocation mechanism as a patronage tool with those in the “reliable radars” procuring forex at much depressed rates as compared to the ruling market exchange rate.
The Zimbabwe National Chamber of Commerce (ZNCC) congress theme “Consolidating the New Normal Economy Through Policy Reforms” is no accident to events on the ground: a new economy is certainly brewing characterised by a small-scale economy — a developmentalist central banking model — limited room for fiscal spending, a burgeoning grey economy as well as an ever-increasing populace of university graduates struggling to find relevance in this obtaining economy.
The formal economy or if you have a penchant for the more colourful descriptor, the “Shadow” or “Grey” Economy, is what is expanding much faster than any economic dimension, a visit to downtown Harare’s Central Business District facing westwards will take you to the “Musina” of the city, named after the border town of South Africa and Zimbabwe because of its affinity to operate underground.
According to the Organisation for Economic Co-operation and Development, two-thirds of the world’s workers will be employed in the “Grey Economy” by 2020. The issue is compounded when you consider the significant contribution the Grey Economy makes to Zimbabwe’s gross domestic product.
By and large, it is an issue created by the lack of inclusion, and the lack of access to formal financial infrastructure, especially in the current situation in Zimbabwe where the gap between the rich and the poor is increasing exponentially.
It might be a painful truth to accept, but the crux of the matter is the dominance of such a “Grey Economy” has turned out to become a new normal economy, any policy interventions by either fiscal or monetary authorities without factoring in this “Shadow Economy” is bound to remain ineffective if not fatal to economic revival.
Tight foreign exchange controls and the central bank’s developmentalist policies may have done Zimbabwe’s economy more harm than good. As usual the intentions are always noble, but the unintended consequences tends to settle that easily.
When the central bank becomes active in supporting the real sector of the economy, other players; notably banking institutions, might find the route uncomfortable given the perceived competition they will be exposed to since the central bank will be advancing credit at much more competitive rates than the institutions it superintends over. But certainly it cannot be a new normal economy to have perennial banking queues as appetite for hard cash remains well above the mooted plastic money remedy.
Most businesses have lost out when it comes to productivity, as most of their employees spend time queuing for cash, and in the process the cost of doing business goes up.
In addition, the interventions by the central bank to cap the interest rates certainly appears developmental in nature, but the dividends are yet to be realised, with the perception and sovereign risk perched this high, it is certainly very difficult if not poisonous to attempt financial repression.
Last year, the government of Kenya promulgated a law to cap interest rates. Such interest rate caps have led to a shortage of funds just as price caps lead to shortage of products. A study conducted by Strathmore University and Invest In Africa shows that the interest rate caps have led to a cash crunch in Kenya’s small and medium enterprise market.
In Zimbabwe, the new normal is to resort to punitive interest rates charged by banking institutions and microfinance institutions and this has created a breeding ground for a “Shadow Economy” to thrive as those borrowers can no longer meet both tax and borrowing obligations in time.
Among a coterie of policy reforms, we as the ZNCC expect the government to expedite the re-engagement process with the Bretton Woods institutions (the World Bank and IMF), to find a lasting solution to the debt headache, seeing fiscal discipline as the current state of affairs, where the first quarter public deficit is already at US$183,2 billion is not sustainable. If such a trend continues it means the projected deficit for the year has to be shifted from US$400 million to US$700 million on average.
Market force interventions must also be respected ahead of any other interventionist moves given the distorting nature of any “invisible hand” to allocate resources. Even Command Agriculture can only enjoy gains, as long as the final product to be marketed is not to have a predetermined value; this is regardless of either subsidies or grants which were extended within the agricultural value chain prior to marketing of the product.
Last but not least, it is our clarion call as the voice of business to see to it that policy direction matches the new economic dispensation. Gone are the days of crafting a contractionary fiscal policy as a way of containing inflation, or an expansionary monetary policy to stimulate demand, the world economy has become so interlocked , and coupled with a multi-currency regime currently obtaining in Zimbabwe, no policy instrument applied here will be sufficient to drive this economy.
Mugaga is an economist and chief executive of the Zimbabwe National Chamber of Commerce( ZNCC). These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: email@example.com, cell +263 772 382 852