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Forex shortages truth

The Brett Chulu Column

CHARLES Lindblom, a well-known political economy scholar, famously quipped in his classic book, Politics and Markets: “In all the political systems of the world, much of politics is economics, and most of economics is also politics.”

Lindblom’s avowal rings true for Zimbabwe — the social upheaval we witnessed last week gave testimony to the thesis that our politics is economics and economics is politics. The social tremor we witnessed last week is a direct result of the movement along a major economic fault-line, forex shortage, created by poor economic policy choices. Government has advanced some theories to explain the forex shortage, except that none of its theories point towards itself. One modern sage has said that we need the authority of truth and not authority as truth. The scientific dictum of organised scepticism directs us to put to test assertions; this piece seeks to test theories crafted by various authorities in government to explain forex shortages.

The graph (top, right) shows undeniable government policy footprints left in sands of time spanning 2009 to the present. The most common theory on forex shortage is advanced by the Reserve Bank of Zimbabwe (RBZ). The RBZ theory has two explanatory variables. First, the RBZ asserts that our forex shortage is caused by a widening trade deficit — a senior director of the RBZ is on record as saying our imports have been exceeding exports every year and, in his words, we were just kicking the can down the road and the shortage of forex was bound to unfold at a future period. His boss has supplied the explanatory mechanism, citing that the liberalisation of forex markets during the Government of National Unity (GNU) was hugely responsible for forex leakages as people could freely access forex and imported with gross uninhibitedness. Second, the RBZ thrust the forex externalisation variable into its forex shortage theory, arguing that billions of dollars were salted away from the economy.

The theory informs the approaches the monetary authorities have taken or will continue to take in a bid to tackle the forex shortage problem. The monetary authorities, informed by the their we-are-not-exporting-enough and we-are-importing-too-much theses influenced government to adopt the (in)famous bond notes export incentive scheme, de-liberalising forex market and rationing forex through the import priority list and import restrictions by the way of the Statutory Instrument 64 of 2016. Let us put into the crucible the assertion that the widening trade deficit is a driver of forex shortage. During the GNU, from 2009 to 2013, our trade deficit ranged between US$1,6 billion and US$3 billion.

During the post-GNU era, our trade deficit has ranged from US$1,3 billion to US$2,9 billion. Here is an inescapable fact: during the GNU era, there were no cash and forex shortages despite imports greatly exceeding exports. Fast forward to the post-GNU period; all of sudden we have cash shortages and the cry of “forex shortages” is first heard and that wail has been unremitting. It is interesting that our trade deficit has massively declined during the post-GNU era with 2016, being the first year since 2009 to record the lowest trade deficit of US$1,535 billion.

In the very year cash shortages wreaked havoc and bond notes were introduced, the country recorded its lowest trade deficit. This is ironic. one would not expect cash shortages and “forex shortages” to set in in the very period the country was narrowing the trade deficit. In 2017, the trade deficit fell further to US$1,307 billion. The trade deficit explanation for forex shortages has no scientific support. Similarly, the second thesis that externalisation is driving forex and cash shortages falls flat for the simple reason that during the post-GNU era more forex was being netted in by the monetary authorities than before.

Admittedly, merchandise exports fell in 2013, the year political hands exchanged as we transitioned from the GNU to the post-GNU. However, exports have been on the up-tick every year without exception from 2014.

One critical variable was not factored into the government theory of cash and forex shortages. The third time series, broad money supply, on graphic clearly tells a powerful, uncensored story of damaging policy choices made once the eulogy of the GNU had been read. From 2009 to 2012, broad money was always lower than exports.

In practical monetary terms, it means that the GNU financial and economic leaders made sure that every real dollar circulating in the country was more than covered by forex generated from merchandise exports.

This is the reason we had no cash and “forex shortages” during the GNU period. In 2013, the very year the GNU folded, broad money supply marginally exceeded merchandise exports by US$53 million. Why? Government began entertaining budget deficits — but how do you even think of a budget deficit when you do not have your own currency? For the first time in the multi-currency regime, there was US$53 million that was stark naked (not supported by export earnings) — these were the first zollars surreptitiously transmitted into the financial system by way of Real-Time Gross Settlement balances. It was a harbinger of things to come. The first electronic bond notes were printed in 2013, but with no fanfare and zest as would be the case in 2016 when the paper version was launched.

The following year, 2014, broad money supply exceeded merchandise exports by US$806 million. We became more daring; in 2015, broad money supply exceeded merchandise exports by a whopping US$1,122 billion and still no word on a facility to cover the naked dollars. And then the historic 2016 happened upon us; US$1,937 billion naked dollars were minted electronically. The genie could not now be contained in the bottle — the civil servants could not be paid in hard cash because phantom dollars were credited. To get out of this mess, we realised that the monthly wage bill for civil servants is about US$200 million and so what did we do? We came up with the hare-brained idea that we could print bond notes to the tune of US$200 million with a command value put at par with the US dollar, “backed” by an external facility. Today we are sitting at almost US$6 billion of naked dollars (broad money supply of US$10 billion less estimated merchandise exports of US$4 billion).

When you create naked, artificial dollars you create opportunities for arbitrage by fixing the rate of phantom dollars and the real US dollar at 1:1 and, with fuel chewing 24% of forex utilisation, artificial forex shortages are created. When the tobacco season arrives, you wonder why we still have a forex crunch — the lender has called for his dues topped with a cool 7% rental (interest) and so we have a billion-plus hole in forex — it is a recipe for disaster, without truth, we cannot be set free.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com

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