ECONOMIC and financial indicators simply do not square with and justify government’s bullishness on the economy. That is a big puzzle.
The most basic definition of economics puts production as its foundation. President Emmerson Mnangagwa over the weekend indicated that the proposed fully-fledged currency expected before year-end would only come in after production has been improved.
The president is suggesting that by the end of this year he would have fixed the economy — that is essentially the sub-text of his promise. From where we stand, all that could go wrong in terms of boosting production has gone wrong. It goes without saying that government is promising nothing short of a Houdini act on the economy.
The official inflation rate, as reported by Zimstat jumped to 97,85% (year-on-year) in May from 75,86% previously.
Purchasing power of the RTGS$ is rapidly dissipating, while labour’s earnings are subdued. Hyperinflation is beckoning. At the time of writing, the forex market had sharply moved in favour of the greenback when compared to the day Mnangagwa indicated that a fully-fledged local currency would be introduced.
The Old Mutual Implied Rate (OMIR) that has been acting as the bellwether and mother lode of the direction of movement of the RTGS$ quasi-currency was sitting at 10,63. The OMIR is based on the principle that the Old Mutual share in Zimbabwe is equal in value with the Old Mutual share in Johannesburg and London, where it is also traded.
The alternative market priced the RTGS$ at 9,8 cents, not far off the OMIR. The interbank rate trailed at 6,12, a gap of 3,68. This margin is worryingly widening; two weeks ago, the margin was 2,54, signalling a free-fall in confidence, given that money supply is static. Bread, the pulse of our socio-economic state, was beginning to be in short supply. State-controlled media reported that grain millers had sent an SOS to government to supply forex to enable wheat imports.
Clearly, the shortage of forex is now dire as wheat imports are a critical essential. In Harare, informal reports are that a significant number of fuel retailers were selling diesel exclusively in forex. This is exactly what this column predicted two weeks ago that Energy minister Fortune Chasi’s threats to the fuel retailers, which forced fuel retailers to retreat, was temporary; they would seek to engage in a behaviour called strategic loss acceptance and the counter strategy of strategic loss recovery.
Unsurprisingly, this week the Reserve Bank of Zimbabwe (RBZ) conceded that it could only supply seed forex to kick-start the interbank market, but did not have the war chest to keep piling into this market.
This column, two weeks ago, satirically said the RBZ brought a knobkerrie to a gun fight after threatening to drop the US$500 million nuclear bomb on the forex market, only to feed drips and drops.
On the tobacco floors, the situation is not looking up, with farmers facing viability challenges due to hikes in levies and the 50% RBZ forex retention threshold almost wiping out their surplus. This does not augur well for next season’s tobacco production, meaning an even more depressed forex generation capacity.
Electricity power supply has declined and its distribution is now very erratic. Industry is not modernising and retooling to boost both production and productivity. The matter of unlocking the collateral value of land to create a market for commercial agriculture land and thereby re-establishing a once vibrant agricultural financing sector has up to now proved to be just talk shop. There are just no signs of 99-year leases becoming bankable and tradable anytime soon.
What is driving government actions in marketing a narrative of overconfidence on the economy is its desire to curry favour with the multilateral institutions.
The Transitional Stabilisation Programme (TSP) which has been turned into the IMF Staff-Monitoring Programme (SMP) is the software steering government thinking. The African Development Bank (AfDB), the World Bank and the Paris Club creditors require that we go through an IMF-sponsored programme to be considered for debt relief and refinancing. Why the SMP proposal was acceptable to the IMF is that it speaks to the neoliberal interests of the multilateral institutions.
This why Mnangagwa over the weekend assured that government would allow market forces to determine prices, ruling out the introduction of price controls to tame run-away prices of basic goods and services. The IMF dislikes quasi-fiscal activities.
Finance Minister Mthuli Ncube knows this. Mnangagwa is awake to the fact that allowing prices to soar without relenting raises political costs. A clever compromise was thus reached — subsidies for urban transport and Mnangagwa’s promised basic food subsidies are to be funded from Ncube’s budget surpluses.
The IMF will not raise objections, as Ncube will argue that the subsidies are not being financed through borrowing. Ncube and Mnangagwa are fully aware that to boost production, an outsized injection of forex is needed. Their quandary is that they know that this injection will not come before Zimbabwe settles its arrears with the multilateral institutions and the Paris Club.
By letting market forces dictate prices, Ncube pushed for the separation of accounts, which caused the battering of the bond note against the United States dollar — all this was to score brownie points with the IMF.
To elicit further applause from the IMF, Ncube made sure he won the battle of removing the 1:1 parity between the bond note and the US dollar, pushing the RTGS$ to float in the interbank forex market. However, this initiative has not succeeded, as Ncube had envisaged, due to low confidence, with the market largely ignoring the interbank market. This has raised the political costs for Mnangagwa — a counter strategy that lowers his political cost, while retaining approbation from the IMF had to be hewed. Enter the local currency.
Ncube had not foreseen the strengthening of the black market for forex to the alarming levels obtaining currently — the bid to expedite the re-introduction of a fully-fledged currency is a reactive strategy to try and decimate the forex black market as it is the single largest risk to a successful SMP. In his thinking, Ncube has calculated that if a fully-fledged local currency is introduced before the final test dates for the SMP, government will finally control the forex flowing into the country and with that control, strengthen the interbank forex market, taming inflation.
This, Ncube possibly thinks will guarantee that Zimbabwe passes the IMF SMP litmus test, forcing the AfDB, World Bank and the IMF to provide financial support and offer Zimbabwe debt relief. Ncube possibly wants a weak local currency but not on black market terms so that our GDP in US dollars shrinks to the point where on a per capita basis we are classified as a Highly Indebted Poor Country so that we qualify for at least 90% of our debt written off by the World Bank and the Paris Club.
There is a big crack in Ncube’s apparent strategy; Washington has not hidden its intentions – it has made it clear that it will block the IMF, the World Bank and its affiliates that include the AfDB to offer any assistance until Zimbabwe complies in full with Zidera. The AfDB came out this week saying it will give a loan to Zimbabwe early next year if its SMP performance gets a thumbs-up from the IMF. The AfDB undertaking is a watershed; it will be the first test for how serious Washington’s Zidera threat is. Do Ncube and Mnanagwa have a plan B should Washington successfully block the AfDB, the IMF and the World Bank from giving Zimbabwe financial help? There is a huge possibility that plan A will collapse.
Brett Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. —firstname.lastname@example.org.