As they say, the best way to predict your future is to create it. The economy lay in ruins after a tightly contested election of July 30, 2018, which saw domestic debt ballooning from nowhere in 2012 to US$9,6 billion by August 2018, with more than half of this contracted between 2017 and 2018, mainly towards populist and election-related expenses.
Owing to the fiscal imbalances caused by disproportionately high levels of government expenditure, which saw money supply shoot to around $10 billion by year end, the economy is on an unsustainable growth path. Despite the improvement in the foreign currency inflows to an all-time high of about US$7 billion in 2018, the country continues to face increasing currency instability. This might have necessitated austerity measures, which however, are being resisted by the poor, who are the most affected.
Despite Zimbabwe’s challenges being structural and thus needing long-term solutions, the ideal policy sequencing dictates that we start by dealing with the current economic irregularities so as to set the platform for the implementation of meaningful reforms. It is therefore unsurprising that, upon entering the government, Finance minister Professor Mthuli Ncube, who had previously called for radical currency reforms, quickly dropped his position to focus on stabilising the economy first through the Transitional Stabilisation Programme (TSP), which is supposed to run for two and a quarter years until December 2020.
However, it seems the USD/RTGS/bond peg, which is assumed during the TSP period, is no longer delivering the expected results as it is now unsustainably subsidising essentials such as fuel at the expense of generators of foreign currency, further distorting the economy. As such, policy makers should brace for increased call for devaluation of local currency (rtgs and bond notes). It is hard to imagine that Reserve Bank of Zimbabwe (RBZ) conceded to the foreign currency allocation demands for Delta, a manufacturer of non-essentials. This entails collecting more foreign currency from its generators, including small scale tobacco farmers.
To achieve the required fiscal rebalance TSP prioritises austerity measures to quell excessive government expenditures, which got us in hyperinflation in 2008 and is now a major challenge in achieving currency stability. Supported by the recently introduced 2% transactional tax, austerity measures are expected to see a reduction in the budget deficit from the projected level of 11,7% in 2018 to 5% of GDP in 2019.
However, the achievement of this target is under threat from mounting inflationary pressures from the recent spate of price increases as well as excessive money supply, whose growth will be accelerated by Treasury Bill (TB) maturities. It troubles the mind how Treasury will deal with the maturing $2,2 billion TBs in 2019, as their continued rollover becomes unattractive to holders due to increasing inflation, which jumped to 31% in October from an average of 3% in the first seven months of the year.
As inflationary pressures mount, the economy will increasingly trend towards redollarisation with a concomitant increase in foreign currency demand. The government might be forced to bow down to growing wage demands from civil servants as they try to cushion themselves from the increasing cost of living. However, government cannot afford to pay salaries in foreign currency, which are projected at around $4 billion, as foreign currency inflows are not even enough to meet our import demands, hence increased reliance on borrowings.
It is not advisable for the country to increasingly rely on commercial facilities such as the Afreximbank one, which are understood to cost around 7% per annum.
Clearly, increasing reliance on such commercial facilities is unsustainable.
There seems to be consensus that the current exchange peg is causing serious distortions in the economy. It is worrisome that, in the wake of these distortions, we have not yet redefined our unit of account, which is making it difficult to aggregate the economic activities, more so when the government is now charging some taxes and duties in foreign currency. As redollarisation unravels, financial reporting will be very difficult. This is why the question of which currency is basing the National Budget has remains unanswered.
These and other issues around the current exchange rate parity will be very difficult for RBZ to continue ignoring as they have the potential to explode into something messy. The fuel situation, which is worsening, ostensibly at the instigation of the unrealistic exchange rate, which made the product one of the cheapest in the world at an implied USD price of 40 cents has the potential to explode into something ugly. This is why we expect the monetary policy, which is expected this month, to largely deal with the issue of the exchange rate.
As a product that consumes about 45% of the country’s foreign currency, we expect a new foreign currency management system that rations out demand for fuel and other so-called essentials, which are now unsustainably subsidised by the unrealistic exchange rate.
Monetary policy interventions are important to salvage the value of the RTGS, which is currently being eroded by its depreciation. We are likely to see the implementation of a hybrid exchange rate system, as RBZ insists on the currency peg to preserve value. With this new forex management system, a lower proportion of say 30% of forex can be set aside for the necessity with the rest auctioned in the market at a price set by market forces and thus preserving the RTGS balances. Contrary to the fears of policy makers, there is no big inflation threat from foreign currency auctioning as prices have already increased during the October 2018 price debacle and from there they have been tracking the parallel market rates.
However, I do not see the government completely floating the exchange rate due to fears of hyperinflation. Neither do I see the country adopting the rand because the conditions of joining the Common Monetary Area are difficult for the country to satisfy. These include introduction of our own currency to be pegged to rand, availability of foreign reserves to defend the currency, loss of monetary policy independence to South African Reserve Bank among others.
However, this notwithstanding, the sustenance of any exchange rate system to be adopted will depend on government’s ability to contain its expenditure or the success of austerity measures. As they say, austerity is a euphemism for pain and that there is huge risk and its measures will be resisted, especially by government. The recent move by Members of Parliament (MPs) to force treasury to allocate them more money to purchase luxury vehicles, among other items they are demanding is quite telling. Overall, we expect an even lower economic growth rate from the current 4 and 3,1% in 2018 and 2019 respectively as the measures to tackle the current economic challenges are contractionary in nature. More will depend on the final economic outturn, which to a large extent will depend on whether the country receives good rains.
Persistence Gwanyanya is an economic and financial expert. He is the founder and deal maker of Percy Advisory Services and Percycon Global Fund Managers (SA). New Perspectives is weekly column coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES), Email firstname.lastname@example.org and Cell +263 772 382 852.