Currency measures lack gravitas

Faith Zaba

In the book Why Nations Fail: The Origin of Power, Prosperity, and Poverty, Turkish-American economist Daron Acemoglu from Massachusetts Institute of Technology and British political scientist James A Robinson from the University of Chicago, talk of extractive economic and political institutions vis-a-vis inclusive ones.

The authors argue, in the book first published in 2012, that when you combine rotten regimes, exploitative elites and self-serving institutions with frail, decentralised states, the outcome is close to a prescription for poverty, conflict and even outright failure.

Acemoglu and Robinson argue that: “Nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth.”

Extractive institutions are deliberately orchestrated by rulers to ensure political power is concentrated in the hands of a few. Extractive political systems more often than not engineer extractive economic institutions, where political bigwigs and a selected minority determine ownership of assets for economic benefits to disproportionately accrue to them to preserve political supremacy and selfishly accumulate wealth.

The book says in many instances, when extractive regimes are deposed, they are replaced by more extractive politicians, who make the situation more atrocious than before. They perfect the art of extraction and are more adept at protecting their looting spree. Such an awful scenario is now obtaining in Zimbabwe, where public funds end up in private bank accounts through political and economic extractive networks.

If government does not rectify this rot, currency stabilisation measures being undertaken will certainly flop.

Finance minister Mthuli Ncube this week announced that the country will adopt a “managed” float exchange rate regime as part of its currency reforms. Ncube said the Reuters electronic forex trading platform was being put in place immediately. This came as the exchange rate moved to as high as ZW$40 to the greenback from around ZW$29 to the United States dollar in less than a week.

The currency stabilisation measures will fail if government does not address suffocating economic and political fundamentals. The currency stabilisation measures announced by Ncube do not address how government will achieve the benchmarked foreign currency reserves.

The International Monetary Fund Article IV report released on February 24 shows the central back averaged forex reserves equivalent to one week of imports. The same report forecasts reserves to average one week import cover. In general, at least three months reserves to cover imports are the benchmark. For distressed economies such as ours, the Bretton Woods institutions recommend four-six months cover. While the budget deficit as a proportion of GDP has commendably improved, the external debt overhang remains a thorn in the flesh.

The bane in our midst is monetary shocks in an economy where real production is depressed. The penchant for increasing money supply to fund national projects that give the ruling party political mileage is fuelling money supply shocks, causing sudden spikes in inflation, resulting from a sharp drop in the value of the local currency. This trend is part of the extractive political and economic mindset.

Big announcements threatening to arrest the so-called currency manipulators have been routinely made, but have not stemmed the rot. That is a sign of deep-rooted extractive politics and economics. Currency stabilisation measures announced lack the gravitas to curtail the extractive processes at play. We are likely to continue witnessing what some observers have termed a freeze-thaw circus, where culprits involved in illegal currency deals are publicly exposed, raising hopes of prosecutions, but the matters are simply allowed to fall in between the cracks.

Just this week, Reserve Bank of Zimbabwe governor John Mangudya told Zimbabwe Independent that there were controlling forces beyond monetary authorities instigating volatile movement of the exchange rate.

“The residual factor seems to be bigger than the role played by monetary authorities in this economy. Who are those moving the exchange rate and for what purpose?” he said.

These deep-rooted extractive practices have the potential to torpedo good technocratic measures.

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