Policy confusion, pandemonium

Misheck Ugaro..Economist

THE case of the Zimbabwe economic landscape presents a unique challenge that will become an interesting field of study most likely leading to new empirical-based thinking and the development of new economic models. This is so because the current landscape defies both classical and neo-classical economic logic, principles and theories. Authorities in Zimbabwe have developed own economic principles and this has led to an unprecedented way of economic management. Zimbabwean authorities are re-writing economics.

The traditional two-legged approach of economic management, run by Treasury and the Reserve Bank of Zimbabwe (RBZ) through fiscal and monetary tools, respectively, is premised on complementarity of each side leading to stable growth of an economy. On one side, fiscal management focusses on the government’s attempt at influencing the economy by means of changes in expenditures, revenues and taxes so as to minimise unemployment, inflation and encourage economic growth.

On the other hand, the monetary authorities aim at influencing the quantity of money (therefore rate of interest) in order to achieve stable prices and sufficient employment and economic growth.

Fiscal policy originates from parliament through the budgetary process. Monetary policy is driven by the central bank and both have essentially a similar goal. As a result, there must be harmony between the two. One side may become completely ineffective if not supported by appropriate action on the other.

This is the area where Zimbabwean authorities have re-written the principles in terms of determining the correct “policy mix”: this is a challenge economists have been trying to answer since the times of Adam Smith in 1776 in determining the extent of government intervention on the working of the market mechanism.

The case of Zimbabwe poses many questions on the level of applicability or efficacy of both classical and neo-classical economic models. We give the authorities the benefit of the doubt by making the heroic assumption that they know what they are doing and are very sure of the country objectives and the results of their policy choices. We would like to believe there is some rational model that has been developed and is being applied. We hope authorities are not experimenting on their ideas.

If the policy direction and turn-backs being experienced are a result of the implementation of the Staff-Monitored Programme (SMP), then God forbid where the country is headed. A picture, which is fast emerging, is that of confusion galore, panic-stricken reactive measures that are made in response to a fast evolving economic landscape. The confusion is not abated by the apparent unbridled corruption that has engulfed the nation.

The result is a bloodbath as authorities appear to be scrambling and clutching at various self-conflicting measures. The complementarity of fiscal and monetary policies seems to fly out the window. The following are issues of note that have created confusion, pandemonium and panic in the economy.
1. The Transitional Stabilisation Programme (TSP) and its intended targets: This was launched by Finance minister Professor Mthuli Ncube soon after the 2018 elections. Its broad objectives can be summarised as follows:Bring the twin devils of budget deficit and current account under control,
Bring down both domestic and foreign debt (pay off arrears),Tame inflation, and Comprehensive currency reforms aimed at export competitiveness and import substitution.

2. Government even signed a SMP with the IMF in order to build a track record of sound economic management. What ensued in the near term is anything but the establishment of a sound track record of economic management. This is not aided by the fact that the elements conspired against these objectives as a severe drought ensued, resulting in drastic underperformance of the agricultural sector.

As if that was not enough, the rains then came in the form of Cyclone Idai with its devastating and fatal consequences and exposed our unpreparedness for natural disasters. This exposed the fallacy of the budget surplus given the inadequacy of our health sector that was seriously under-stocked of medicines and even staff went on strike several times for better wages.

By the time we received the Mid-Term highlights in August, most of the targets had been missed and/revised. The only area performing above target was the budget surplus of ZW$813 million to June 2019, coming largely from the intermediated tax of 2%.

While the current account overdraft seemed to have been tamed, the monetary authorities on the other hand were allowing money supply growth in order to meet the government’s penchant on expenditure, thereby effectively negating both the surplus and the reduced overdraft. The result was the commencement of heavy depreciation of the local currency with a resultant kick on inflation.

The budget surplus became meaningless, especially given the severe shortages of essentials such as drugs in hospitals, seriously eroded civil servants salaries and falling production.

Other key areas were missed and, as a result, a supplementary budget projecting a deficit of ZW$4,5 billion to the end of year was proposed. This is disaster in terms of the TSP and related austerity measures that the nation had endured and was now looking more to positive results, which are now clearly like a pie in the sky for the masses.

In February 2019, the monetary authorities finally faced the truth and debunked the parity fallacy of the bond against the US dollar and established an interbank trading market. This marked the beginning of an amazing whirlwind period of policy directives, reversals, re-directives, corrections and re-corrections.

It is amazing how the monetary authorities seem to now micro-manage the market on a daily basis. At the point of establishment of the interbank market, the local currency was split away from the United States dollar and all local transactions ordered to be carried out in local currency.

Further announcements led to the complete ban of the US dollar and declaration of the RTGS dollar as the only legal tender accepted on local transactions. Further directives created more confusion as various sectors and transactions were reclassified as exempt from the use of the RTGS dollar.

Meanwhile, the exchange rate continued galloping but at the same time the authorities continued on the printing press. In a recent statement, the authorities created an incentivised US dollar-denominated savings bond only to devastatingly destroy it by directing that no withdrawals from any FCAs will be in foreign currency. In very few words the authorities menacingly advised the market that they will raid all dollar-denominated accounts.

Given what we have now experienced in these last two weeks in particular, an unprecedented flurry of daily doses of directives from the authorities, the situation has now become a circus and we can only describe this as the signs of panic and confusion, so perhaps our heroic assumption above is not really heroic after all.

In conclusion, therefore, a solution is within the grasp of the authorities. Let us go back to proper economic theory and acknowledge that market behaviour cannot be legislated. Our market has effectively re-dollarised. The least we can do is to manage that process direction and maybe intervene on which currency to adopt. Let us dialogue.

Many have argued for the rand, albeit with the attendant Rand Monetary Union conditionalities. However, this is a better devil in the medium term to allow our economy to regain traction and tilt back to balance.

Ugaro is a former expatriate banker based in several Sadc countries and currently works as a corporate advisory services consultant. He is a member and past vice-president of the Zimbabwe Economics Society. — misheckugaro@hotmail.com