FINANCE Minister Mthuli Ncube yesterday steered clear of the explosive issue of currency reforms — particularly exchange rate liberalisation — which he badly wanted after being subtly pressured by monetary authorities and International Monetary Fund (IMF) officials behind the scenes.
By Kuda Chideme
Informed sources said yesterday that Reserve bank of Zimbabwe (RBZ) and IMF officials had warned Ncube that currency volatility and inflationary pressures could worsen — unleashing further mayhem in the market and economy in their wake — unless the reform process is simultaneously accompanied by structural reforms, reduced fiscal deficits and monetary expansions, and external funding.
An IMF team led by mission chief Gene Leon was in Harare recently to meet government officials, central bank executives, legislators, business leaders, labour representatives as well as members of civil society over the country’s dire economic situation and gloomy future outlook.
One of the most burning questions was currency reforms, especially exchange rate liberalisation. Although Ncube wanted the currency reforms, including freeing the exchange rate, IMF and RBZ officials expressed discomfort on the timing and sequencing of the measures, cautioning that if this was done without prerequisite fiscal and monetary interventions it could intensify market turmoil and economic destabilisation.
Ncube yesterday abandoned his currency reform plans as he maintained the unsustainable myth that local quasi-currencies — the Real Time Gross Settlement, bond note and mobile money transfers — were trading at par with the United States dollar.
He also kept the multi-currency system amid attendant contradictions writ large which will almost certainly fuel the parallel market and arbitrage. Flaws and inconsistencies were apparent in his budget speech on currency matters as government took the lead in re-dollarising by demanding duty on some imports in foreign currency, while restricting other players in the economy from charging in foreign currency. In their early October monetary and fiscal policy interventions, Ncube and RBZ governor John Mangudya separated foreign currency (US dollar) and local quasi-currency accounts, virtually acknowledging the currencies were not at par; a move interpreted by the market as de-dollarisation. Ncube’s move to charge duty on some products in forex effectively indicated re-dollarisation, although grey areas remain. Sources said Ncube had been privately communicating with IMF and RBZ officials on the currency issues, mainly the exchange rate reform bid, but was told that his timing may be catastrophic. That and the current turmoil, sources said, forced him to abandon his currency agenda.
Although Ncube and some business executives in Zimbabwe think removing foreign exchange controls and freeing the exchange rate would deal with market distortions and forex allocation bottlenecks, IMF and RBZ officials said this move without the required fundamental support measures — structural reforms, external funding, and reducing foreign deficit and monetary expansion —will not yield the desired results.
Sources while the IMF – advocates of the Washington Consensus which emphasises free market reforms and removal of economic controls – and RBZ know that fixing the exchange rate in the face of external shocks without the prerequisite supporting fiscal and monetary measures will result in an overvalued exchange rate and exert pressure on the balance-of-payments, they want Ncube to sequence the reforms to avoid a calamitous big bang approach.
The IMF a few years ago did a study titled, Exchange Rate Liberalisation in Selected Sub-Saharan African Countries Successes, Failures, and Lessons, which clearly showed the danger of exchange rate-based stabilisation efforts without supportive fiscal and monetary policy measures.
The research, done by Nils Maehle, Haimanot Teferra, and Armine Khachatryan, covered a number of sub-Saharan countries, including some in the region, such as Ghana, Uganda, Kenya, Tanzania, Malawi, Mozambique and Zambia.
“The case studies tell a similar story — the reforms worked. The reform periods
marked the end of prolonged severe crisis and, in several cases, decades of declines, and, when sustained, the start of a strong and ongoing economic expansion,” the IMF study says.
“Exchange rate liberalisation was a fundamental element of the reform effort in all successful cases, but so were structural reforms, reduced fiscal deficits and monetary expansions, and external assistance. The attempts to fix the exchange rate in the face of external shocks and without supporting fiscal and monetary policy resulted in overvalued exchange rates and severe pressure on the balance-of-payments.
“Efforts to contain these pressures through price control, rationing, and import licenses depressed the economy, reduced fiscal revenue, and caused external trade to shift to the informal sector. The case studies also clearly show the danger of exchange rate-based stabilisation efforts without supportive fiscal and monetary policy.
Attempts to fix the nominal exchange rate through administrative means at levels that were inconsistent with the underlying fundamentals and fiscal and monetary policies resulted in an increasingly overvalued exchange rate and foreign exchange shortages that forced the authorities to either resort to increasingly damaging controls and rationing, or to undertake large ad hoc devaluations, which can have devastating effects on growth and poverty reduction. Finally, the cases illustrate the importance of sustaining the reforms because it takes time for the full benefits of reforms to be realised.”
When Ncube arrived in the job early last month he was clear he wanted currency reforms – that is removal of bond notes and other quasi-currencies and dollarisation or adopting the South African rand as the anchor currency, as well as floating the exchange rate – but he was quickly given a reality check by Treasury and RBZ officials.
Ncube’s idea of reintroducing a local currency, the demonitised Zim dollar, was also deemed too hasty by Mangudya, who subtly warned the minister in his monetary policy statement on October 1 that doing so would be akin to “putting the cart before the horse”.
“We are working on the pre-requisites in this economy for a currency reform agenda; that would be suicidal. Let me repeat, it would be economic suicide for this economy if the Government of Zimbabwe was to do that (free-float exchange rates),” Mangudya said.
“That would mean overnight, people will offload their RTGS balances and purchase the little foreign currency that is on the market. It will bring distortions in the market and prices will go up overnight. By doing so, it will be inflationary and you are going to ask for higher salaries and at the end of the day, we will have spill-over effects.”
As a result, Ncube was yesterday forced to focus on tackling the twin evils wreaking havoc on the economy: budget deficit and current account deficit to ensure fiscal equilibrium and consolidation.
The two issues, and a series of authority measures to deal with them and other economic problems, were central to his budget statement yesterday.
Zimbabwe’s unsustainable budget deficit surged 7,1% to US$2,7 billion (10,9% of gross domestic product – GDP) in the nine months to September 30 2018 compared to US$2,52 billion last year driven by unbudgeted expenditures, as it is set to scale US$2,9 billion by year-end.
Ncube said the 2018 budget deficit is projected to rise to US$2,86 billion, representing 11,7% of GDP, against a target of US$793 million.
“Revenue collections for the nine months to September 2018 amounted to US$3,8 billion, against a target of US$3,4 billion, and by year-end, collections of US$5,5 billion are anticipated,” he said.
“On the other hand, total expenditures during the same period stood at US$6,5 billion, against a target of US$4,1 billion. Accordingly, expenditure outturn to year end is estimated at US$8.2 billion against a budget of US$5,3 billion, implying an expenditure overrun of US$2,8 billion. The 2018 budget deficit is projected at US$2,86 billion (11,7% of GDP), against a target of US$793 million.”