Fiscal surplus won’t stymie instability

AVAILABLE official fiscal data show that Finance minister Mthuli Ncube has generated $1,1 billion (read RTGS dollars) from December 2018 to the end of March 2019 — a remarkable feat in a space of four consecutive months.

According to the Treasury Quarterly Bulletin: 2018 Fourth Quarter published by the Finance ministry, government posted a budget surplus of $732,7 million in December last year. Last week in Bulawayo at the Zimbabwe International Trade Fair (ZITF), Ncube was on record as saying: “We are doing very well on the fiscal front, Honourable VP (Constantino Chiwenga), your government is solvent, we are running surpluses and we have been doing average surpluses of $100 million since September last year when we came in. In January, we had surplus of $102 million, February $85,5 million as we had to take into account cushioning of civil servants. In March our surplus doubled to be just about $200 million.”
Stitching together these pieces of data, we arrive at a four-month budget surplus of $1,12 billion.
This ocean of surpluses is failing to bring stability to the economy, with the inflation dragon going feral, fed by galloping prices of goods and services. This is not the script that Ncube penned when he took charge of Treasury.

Ncube expressed fear that his initial thesis had been thrown to the wolves: “So, where is pressure on the exchange rate coming from? Before we knew that it came from the fiscus, we were monetising the fiscal deficit and then money supply would grow, but now where is the pressure coming from? So, clearly as the VP said, it is speculation and that speculation is not a good idea, we know who is driving it.”

Ncube has encountered what is called in the cycles of theory-making an anomaly. Instead of doing what researchers guided by the cycles of theory-making do — re-classifying their research categories so that a new explanation can account for the anomaly, hence improving the theory — Ncube chose to launch a blame game because he strongly believes his theory is infallible.

This explains why he took to lecturing the nation on the basics of economics — we had an allocution from the learned professor on Economics 101. In his piquant address, he pontificated that businesses were not following the principles of economics in their current pricing models, causing price volatility and an upward trajectory in inflation at a time money supply growth is being contained and monthly budget surpluses are being generated.
We thought we had heard enough. It was not to be.

No sooner had Ncube finished his homily than Eddie Cross, an ardent supporter of Ncube’s economic ideas, tore into the Reserve Bank of Zimbabwe (RBZ) for “sabotaging” economic revival. Cross, in his bare-knuckled, no-holds-barred take-down of the RBZ, revealed that the RBZ governor John Mangudya has, from the onset of Ncube’s tenure as Finance minister, had sharp differences with Ncube over economic policy. Both Ncube and Mangudya, at the post-Monetary Policy Statement breakfast meeting, publicly denied that they had differences, practically insinuating that the supposed sharp differences were inventions of the private media. Cross blew open this ruse.

Cross, all but confirmed that the current monetary policy announcement was delayed by five weeks due to the differences, resulting, according to Cross, in President Emmerson Mnangagwa intervening to break the impasse, birthing a compromise monetary policy. Ncube did not get what he wanted, neither did Mangudya. This explains why a managed or dirty forex exchange float was announced when the inter-bank forex market was launched. Therein lies the nub of the matter that has freaked Ncube out.

The chances that Ncube and Cross’s arguments are random occurrences is extremely low. I do not write addressing the persons of Ncube and Cross — that is not my style — I mention them as representatives of a set of ideas pertaining to Zimbabwe’s economic revival. Both gentlemen — informed by the thesis that if the government does not overspend and the money supply tap is closed, the forex rate will drop and inflation stabilise — predicted economic bliss for the country in the second quarter of the year. Instead of the envisaged transitional stability, we have transitioned from instability to greater instability.

I am also a farmer. A bag of Compund C fertilizer was RTGS$48 at the end of February and now it is upwards of RTGS$110, an increase of 229% in two months. It is totally insane. A well-performing stock exchange in a normally-functioning economy takes 10 years on average to double its market capitalisation! The two gentlemen have no option, but to quickly find a way to explain why the train is not arriving at the destination as promised. Ncube has chosen the way of schooling business on how to do business. Cross has chosen a more nuanced position, blaming Mangudya, for a monetary policy that he (Cross) thinks is working at cross purposes to the fiscal policy. I tend to agree with Cross to a greater extent that the compromise monetary policy is not complementing the apparent fiscal discipline government is marshalling.

In an article in this column commenting on the apparent policy differences between Ncube and Mangudya on the eve of the announcement of the February 20 Monetary Policy Statement, it was argued that a managed float meant the RBZ would be actively involved in buying and selling in the inter-bank market. I raised the argument that the RBZ did not have both the firepower in terms of the local currency to buy forex from exporters and the seed forex to defend its +/- 2,5 band. I mentioned that Ncube would not allow the printing of more money to enable the RBZ to buy forex as it would need to expand its local currency war chest by at least 2,5 times after the removal of the 1:1 exchange peg.

True to his word, Ncube has shut the RTGS electronic printing press. The RBZ has simply no money to buy the forex, hence the inter-bank forex is dry. Like Cross, I had advocated that the forex market be fully liberalised, not the dirty float compromise. If we had fully liberalised, there would have been no parallel market at all to talk about.

In addition, the RBZ has been borrowing from the likes of Afreximbank, on the back of guarantees of future tobacco forex inflows — a substantial portion of forex inflows has to be channeled towards servicing short-term debts contracted by the RBZ, contributing to a dry inter-bank forex market. The optimism exhibited by Ncube and Mangudya that the tobacco season will help tame runaway parallel forex market rates is thus misplaced.

I will respond to Ncube’s thesis that businesspeople are speculating and thus causing the forex rate to go feral.

The rudiments of currency strength go beyond fiscal stability because we are talking of fiat currencies, backed by people’s confidence in the authority that issues currency. This is basic economics. So when the market expresses its collective verdict on the value of the currency, why should Ncube argue with the market?

A plummeting currency in the face of fiscal stability means there is a large confidence deficit. Fiscal stabilisation is not the only factor that creates confidence-keeping promises is equally important. Government promised money would be available in the inter-bank market; it is not there and government is not providing answers. Where is the promised forex?

What is the way forward? Move to full liberalisation of the forex market. Stop massaging bruised egos through half-liberalisation compromises. Zimbabwe is bigger than personal egos.

Brett 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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