Economic deception has its limits


The Brett Chulu

THERE is a limit to deception – the numbers on the economy are telling the real story, not the utopian view painted by our monetary and fiscal authorities.

Hyperinflation reached

The most widely accepted definition of hyperinflation from an economics viewpoint is a monthly rate of 50% which is sustained over a period of 30 consecutive days. This is the definition hyperinflation authority Steve Hanke applies. The attempt by government to hide the year-over-year inflation figures under the pre-text of rebasing, following the banning of multi-currencies on June 24 in preference to the smaller-quantum month-on-month figures that do not alarm the general public was arguably done to prevent fuelling inflationary expectations.

Barely hours after Finance Minister Mthuli Ncube announced his 2020 budget than ZimStat published the month-on-month inflation figure for October. ZimStat revealed that the month-on-month inflation jumped from 17,72% in September to 38,75% in October. This means that from the time year-on-year inflation figures were discontinued in June, prices in general spiked 3,25 times, based on official statistics. That is a huge erosion of purchasing power in a space of five months. If the October month-on-month inflation were to persist for another five months, general price levels will soar 5,14 times.

That would mean prices at the end of March 2020 would have swelled 16,71 times since the discontinuance of month-on-month inflation figures. The month-on-month inflation figure computed by ZimStat is composite, based on a basket of goods and services. The real indicator that hyperinflation has been reached is the food and non-alcoholic beverages sub-index, representing the biggest chunk of household expenditure in Zimbabwe.

The sub-index soared to 48,35% from 19,95% in September. It is a well-known fact that in sub-Saharan Africa, the majority of households spend more than 50% of their income on food. On that note, hyperinflation in Zimbabwe, is felt the strongest in food purchases .

For practical purposes, the food sub-index tells us that we are officially in hyperinflation. This is the single biggest indicator that the Transitional Stabilisation Programme (TSP) has failed.

Inflation was 3,6% in 1980. It averaged 12% in the period 1985-1990. An off-trend in inflation of 31,85% was recorded in 1983 — it was due to drought.

Another off-trend spike of 45,72% inflation in 1992 was recorded, again, driven by drought. The average inflation between 1993 and 1997 was 20%.

This inflation historiography is a big indictment on post-coup economic management. The October month-on-month food and non-alcoholic inflation is higher than the highest ever year-on-year inflation before the post-2000 mad years. There is no greater indicator of inflation stabilisation failure than this.

Growth over-optimistic

The hyperinflation environment tells us that real economic growth for 2020 projected by Ncube, at 3%, is overly optimistic. The 2009 budget was US$973 million. In 2010, it grew to US$2,339 billion, an increase of 140%.

In 2011, the budget grew to US$2,931 billion, a growth of 25,3%. In 2012, the budget grew to US$3,64 billion, an annual increase of 24,2%. This growth in the size of the budget, reflected the real GDP growth of 5,4% in 2009, 9,6% in 2010, 9,4% in 2011 and 5,4% in 2012. This growth was underpinned by low inflation, ranging from -3,31% to 3,5%.

Ncube dramatically altered his pre-budget ceiling of ZW$28,5 billion to ZW$63,8 billion. The pre-budget ceiling was the equivalent of US$1,9 billion(interbank) and US$1,39 billion (alternative market).

Ncube, during the pre-budget seminar week, went on public saying the economic fundamentals (by which he meant the reserve money which had doubled) warranted a ZW$:US$ rate of 7:1. This implied a US$4,07 billion budget. It would appear that Ncube realised the unsoundness of the proposition and then settled for a ZW$63,8 billion budget, translating to a budget of US$4,14 billion (interbank). It is a well-known fact that Ncube bandied about the 3% economic growth projection figure for 2020 when his budget ceiling was still ZW$28,5 billion. There is a big challenge there; how does he still maintain a 3% growth forecast after dramatically inflating the pre-budget 2,25 times? The science there is very suspect. In the GNU period, the economy grew by an average of 7,45% per year.

Each 1% real annual growth correlated with an additional 5,36% annual growth in the budget, under stable inflation conditions. Ncube’s pre-budget ceiling, represented a contraction of the budget to 2009/2010 levels, but under high inflation. That scenario, as per science, points to negative GDP growth for 2020.

The reason is quite straightforward; government budget is largely supported by tax revenues, which tax revenues derive from corporate and individual economic activity. A huge contraction in the budget indicates that a corresponding contraction in economic actvity is expected.

Rational skepticism, the fare scientific analysts are fed on in their training, leads to a politically incorrect conclusion — Ncube’s own figures tell a prophecy of economic decline, not growth for 2020.

Deception backfires

Zimbabwe’s new currency was surreptitiously introduced in 2013, not in June this year. When the GNU ended, the new regime embarked on unrestrained and unremitting fiscal indiscipline, leading to borrowing from the market. Credit-creation was done, creating new money, all perfectly legal. There was a challenge; banks were creating new money in what currency?

It had no name, but is was a local currency, trading electronically. Under normal credit-creation process, the central bank prints a small proportion of money supply as cash based on the age-old banking fact that in a trusted banking environment, customers do not use a lot of cash — thus the new money circulates in cheques and electronic transfers. So we had a situation where the banking system was not trusted and massive credit-creation due to unprecedented fiscal indiscipline is done under a multi-currency regime — a perfect storm was brewing. People withdrew cash until the real US dollars cash supply could not support the demand, revealing the deception monetary authorities had been hawking.

Caught out, the central bank began to heavily promote the use of plastic and mobile money, because it would buy it time. It then introduced the fallacy of bond notes being backed by the Afreximbank loan and declaring the bond notes were at par with the US dollar — it was simply a harebrained strategy to get around the restriction to print forex, impossible under a multi-currency regime. The central bank had to print cash because it had created a new local currency from 2013 operationalised as RTGS balances. The export incentive and Afreximbank backing were all a smokescreen. The desire to deceive the public through the 1:1 fallacy created a Gresham condition: bond notes (physical form of the RTGS balances) were bad money and forex was good money. Bad money drove out good money, hence acute forex shortages and the priority list invention.

Then Ncube burst on to the scene and separated the accounts into forex and nostro. This is when the market finally realised that the electronic balances were not what the central bank was saying they were. The market realised that it had been duped since 2013. Reverse-Gresham set in; good money began driving out bad money — call this self-dollarisation. Government did not like this; it then banned multi-currencies, trying to reverse reverse Gresham. The market just called the government’s bluff; reverse Gresham is not reversing. Deception has limits. It gives you pyrrhic victories, but destroys confidence once the markets realise they are habitually and being intentonally deceived. The monetary and fiscal authorities must do a Monetary & Fiscal Truth and Reconciliation to rebuild confidence.

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

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