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Economy under cobra effect

The Brett Chulu

THE cobra effect is upon us. In an article carried in this column on July 12 titled Upward exchange rate pressure, in the conclusion leased the cobra effect.
The article signed off in this fashion: “Legend has it that once in colonial India, there was a plague of cobras.

The government of the day looked to its economists for help. Typical of economists, they proposed an incentive; anyone catching a cobra would be rewarded monetarily. Holy cow, the cobra population dipped. Barely after the celebrations had started than there were reports that the cobra population was on the rise — people were now farming cobras for income! Government economists convinced the government to remove the incentive. People obliged by releasing the deadly snakes; there were now more cobras than before the incentive. God forbid that this cobra story unfolds here.”

In simpler terms, the cobra effect is when economic incentives or disincentives imposed to alter a targeted socio-economic behaviour backfire and instead strengthen the phenomenon the incentive/disincentive designer intended to change.

In recent times, in Israel, economists were contracted by a top pre-school to solve a problem: Many parents were picking up their children late from school. Economists advised that a penalty be imposed on the parents to encourage them to pick up their children on time. The penalty backfired.

More parents than before were now picking up their children late. It turned out the parents had found a very cheap way of securing an extended child minding service.

It has also been argued by behavioural economists puzzled by the phenomenon that the imposition of the disincentive expunged guilt from parents’ minds as they could pay their way out of their guilt.Our economy is in the throes of the cobra effect.

The fast-paced movements of events in our national economy and finances in the past three weeks came to a head this week when thousands of EcoCash agents were effectively banned from operation when the RBZ banned the cash-in, cash-out facilities.

Based on an analysis of economic and financial indicators, current and latent, this column has in recent times characterised the path of destruction our economy is firmly on as “economy on a wing and prayer” and “economy nears Bermuda Triangle”.

Now an economy on a wing and prayer nearing the eerie Bermuda Triangle is an exceedingly scary thought. Our monetary authorities, commendably, this week cast off all pretence of super-normalising an ailing economy. It seemed to have dawned on powers that be that indeed the economy was on a wing prayer and that this one wing was showing signs of snapping off as the Bermuda Triangle spookily beckoned.

The swift response to freeze the accounts of four firms that were suspected of being the drivers of the fast-paced plummeting of our ZW$ on the forex parallel market was an unmistakable sign that our authorities had been jolted out of the denial bed made in slumber land.

That swift action indeed caused the Zimbabwe dollar to recover from the mid-20 levels to under-20 to the US dollar. This dip which was as spectacular as was the spike a few hours before was masked by the well-known phenomenon of rates softening during the weekend.

As a result it was difficult to isolate the contribution of the accounts freeze and that of the weekend rate dip effect. No sooner had the weekend ended (no pun intended) than rates picked up again — the Zimbabwe dollar was plunging again — even with the freeze of the flagged accounts in place. On Friday last week, in characteristic reactive mode , the government gazetted two statutory instruments (SIs); SI 212 (Exchange Control Exclusive Use of Zimbabwe dollar for Domestic Transactions Regulations 2019) and SI 213 (Presidential Powers Temporary Amendment of Exchange Control Regulations 2019).

The aim of these two instruments is unmistakable — it is arguably all to do with countering the invisible entrepreneuring strategies the populace is employing to get around the impediments thrown in their way by the recent monetary and fiscal pronouncements — namely — the banning of multi-currencies for local transactions, high forex retention thresholds imposed on exporters by the Reserve Bank of Zimbabwe, the shortage of paper money, and the indiscriminate 2% Intermediate Money Transfer Tax.

It is SI 213 that is of greater relevance to this discussion; a section on civil penalties for “the sale, offering for sale, quoting, displaying, charging, receipt or payment in any currency other than the Zimbabwe dollar for goods and services whose purchase, sale or disposal are or are deemed to be a domestic transaction”. The banning of mobile money cash-in, cash-out and cash-back facilities put side by side the two SIs gazetted last Friday is government’s response to the plunging Zimbabwe dollar. In their thinking, this will effectively stabilise the Zimbabwe dollar.

The chances of these moves to succeed are low for a simple reason: The underlying causes fuelling the lack of confidence in the Zimbabwe dollar have not been addressed — low productivity, forex leakages in reaction to punitive forex thresholds and renewed fiscal indiscipline.

It is like trying to repair leaks in an irrigation system with broken pipes using irekeni (rubber from tyres) — all you do is temporarily reduce leakage on a specific point and transfer hydro-pressure to other weak points causing even more serious leakages and bursts.

What I have learned about economic players and agents living under a difficult economic environment from the classic grounded model of invisible entrepreneuring is that they will invent new ways of circumventing the hurdles. When multi-currencies were banned, dollarisation took the covert form, with people indexing prices to the exchange rate.

By banning multi-currencies, government had played the Hail Mary pass (one last desperate throw forward in the game of American football hoping your teammate will catch the ball and run to score), as famously put by one analyst.

There is no more Hail Mary pass to play. The last card was played by prematurely banning multi-currencies. As predicted by the invisible entrepreneuring model, economic players are adjusting to align with the SIs but still thinking in US dollar terms.

Some economic agents are no longer accepting mobile money and swipe, accepting bond notes only — this obviously is a ploy to force people to buy cash or exchange their US dollars for bond notes. The strategy is clear: hard cash transactions will enable black market transactions that do not leave any paper or electronic trail. Registered bureaux de change do not offer bond notes. The pressure for day-to-day living will force people to move back to overt US dollar use. The EcoCash premiums will simply transfer to hard Zimbabwe dollar cash by way of an inflated exchange rate.

Normal economics would have dictated that scarce bond notes demand will increase causing the Zimbabwe dollar to strengthen — this is not likely to happen because the confidence in the Zimbabwe dollar is low. Rumour is circulating that government converted Sakunda a US$336 million bond issued in January to Zimbabwe dollar rate above 1:1 flooding the market with effectively close to ZW$3 billion of new money, printing electronic money like in the olden Helicopter money days. Such actions undermine confidence in the Zimbabwe dollar and strengthen economic players’ resolve to shun the Zimbabwe dollar as a store of value. Instead of the scarce bond notes gaining value as demand for them swells, they will likely plummet in value.

Pressure for hard cash as retailers reject electronic money, will force government to print more hard cash and may be tempted not to retire the electronic balances of the same amount. In addition, the gutsy and politically connected will likely accept US dollar for transactions and invoice in Zimbabwe dollar.
It is time for prayer.

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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