Fiscal measures fail to douse the flames

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LAST week’s monetary policy pronouncement by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya, buttressed by fiscal measures introduced by Finance minister Mthuli Ncube, have failed to bring immediate relief to the deep-seated structural challenges besetting Zimbabwe’s tottering economy, evidenced by the spiralling of prices, shortage of basic commodities, widespread speculation and rising inflation.

By Tinashe Kairiza

In elementary terms, the core function of monetary policy as a tool for central banks is to regulate money supply, thereby stabilising prices and, in the long term, induce employment creation.
However, the monetary and fiscal interventions by Mangudya and Ncube fell far short of stemming the rising tide of commodity prices, massive company closures and the multi-tier pricing system prevailing on the market.

The authorities are at sixes and sevens in their attempt to deal with rampant arbitrage emanating from the now glaring disparities between the bond currency introduced in 2016 and the United States dollar. The disequilibrium between the fiat currency and the greenback has triggered alarming speculative tendencies on the market, fuelled by individuals seeking to profiteer, while others are looking to store value. At its inception, government, then led by long-time ruler Robert Mugabe postulated that the surrogate currency, introduced to incentivise exporting firms, would trade at par with the greenback.

The fiat currency has, however, been rapidly losing value against the US dollar, triggering panic in the market, while sapping confidence in President Emmerson Mnangagwa’s administration which has pledged to fix Zimbabwe’s broken economy.

In his admission, while addressing British think-tank Chatham House in London this week, Ncube, a Cambridge-trained economist, broke ranks with government’s official position that the surrogate currency had equal value with the US dollar, asserting that the bond note was inferior to the greenback.

“The market is setting the pace. The market is doing everything; we are going through a transition. The market has said these currencies (US dollar and bond notes) are not at par. I don’t want to argue with the market. The bond notes will, at some point, have to be demonetised and I cannot tell you when,” said Ncube in London while on a mission to mobilise fresh funding for the cash-starved southern African country.

Mangudya, in his monetary policy interventions, also reintroduced foreign currency accounts (FCAs), ring fencing them from Real-Time Gross Settlement (RTGS) accounts, though he felt short of admitting that the US dollar was rapidly firming against the fiat currency by the day.

This week, premier alternative market tracker Zimbollar forecast that US$1 was fetching more than $3 bond on the black market, with clear signs that the greenback would continue to firm against the surrogate currency — hardly a week after the monetary and fiscal policy pronouncements.

Quite tellingly, Mangudya promised to step down as central bank chief if the surrogate currency crashed and disrupted markets two years ago when he introduced the bond notes.

Critics of the monetary policy approach pursued by Mangudya draw similarities with how former governor Gideon Gono consigned the local dollar into the dustbin of failed currencies at the height of Zimbabwe’s hyperinflationary era through disastrous economic policies.

To their credit, Mangudya and Ncube rightly diagnosed key maladies crippling Zimbabwe’s fragile economy, namely the unsustainable issuance of Treasury Bills (TBs) and government’s unrestrained and illegal appetite for borrowing from the central bank outside the stipulated limits. Among a raft of monetary and fiscal interventions announced by the duo, government was sanctioned to stop abusing the central bank overdraft facility, while the issuance of TBs — which topped US$7,6 billion by end of August would be reviewed to “crowd in” the private sector.

However, the introduction of a 2% tax on electronic money transactions has drawn widespread condemnation from long-suffering Zimbabweans who perceive the latest revenue collection regime as triggering a wave of price increases, among other symptoms of the crisis crippling the local economy.

In a climb down, government has said the 2% tax increase will be exempted on transactions not exceeding US$10, but criticism of the levy still stands amid a tide of skyrocketing prices, chronic foreign currency shortage and a biting liquidity crisis.

The Law Society of Zimbabwe (LSZ) has also waded into the tax increase debate, challenging the legality of the hike, which it contends is in violation of the Finance Act.

“In light of the serious financial and practical implications of the announcement to all enterprise and common persons, there has been a public outcry and calls for the minister to rescind the announcement,” LSZ said in a statement this week.

“The Law Society of Zimbabwe (LSZ) and its members support the call that the two cents per dollar tax on all transactions be rescinded because, among other reasons, its imposition is unlawful.”

Ncube’s Transitional Stabilisation Programme, also launched last week, is meant to address some of the structural problems blamed for haemorrhaging the fragile economy.

The programme, which will run for the next two years, will, among other objectives, seek to cut down government expenditure through downsizing the civil service sector whose wage bill gobbles up about 90% of public revenue, reforming and privatising insolvent and struggling state enterprises and boosting exports.

However, analysts contend that the latest monetary and fiscal policy pronouncements by the RBZ and the Treasury chief dampen confidence in a fragile economy characterised by widespread company closures, joblessness, sharp commodity price increases and a chronic foreign currency shortage.

Economist and Buy Zimbabwe executive Oswell Binha contends that the monetary and fiscal policy pronouncements fell short of addressing the “elephant in the room, thereby triggering the unintended consequences of price increases”.

“I think they (price increases) are the unintended consequences. What was expected by stakeholders is not what was announced. He (Ncube) put the cart before the horse. The elephant in the room is government expenditure. There was need to address that big hole.

Economist Tinashe Kaduwo contends the policy pronouncements have unnerved the market with speculation swirling that Zimbabwe will revert to its local currency.

Bindura University commerce lecturer Felix Chari said Ncube’s fiscal interventions “failed to restore confidence in the Zimbabwean economy”.

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