A currency that never was

Chris Mugaga

AS Theresa glimpsed through the window of her office in a 16-storey building in the middle of Harare’s central business district, the fate of a once vibrant and promising city have dismally evaporated into a thick aura of doom and catatonic uncertainty.

Everyone seems uncaring, if not oblivious to the demarcation of illegality from what is acceptable to the laws of the Zimbabwean state. The southern African nation is in a quandary, no one is comfortable going to bed without pondering the following day’s parallel market exchange rate. Currency turmoil is wreaking havoc in the economy.

When one of the most respectable voices in the corridors of global finance— the cigar-smoking former chairperson of the Federal Reserve, Paul Volcker— who once said central governors must listen but not hear political noise, it appears he had Zimbabwe in mind. This nation’s prospects are not hinged on tapering off either the reserve money or broad money as argued in most academic circles of the nation; rather it is lack of independence of institutions, stupid! If Vision 2030 is to be fulfilled, there must be adherence to the rule of law, creation of functional independent institutions, toning down of 2023 electioneering, re-engagement of the international community, the tackling of lawlessness and self-enrichment and, above all, the engendering of honesty.

The reluctance by the government to realise that the local currency is yet to attain the normal status of a functional currency is quite worrisome. Officials continue announcing monetary and fiscal measures basing on a currency they do not believe in. When they want to set the capital requirements of banking institutions, they prefer to calibrate the amounts in the greenback.

To worsen the situation, the veil of free funds has been abused to hide behind a failed attempt to de-dollarise. Given the ratio of foreign currency deposits-to-broad money supply is at 37%, surely the bulk of such funds are free funds, and factoring in the nominal value of the Zimbabwean dollar, one can conclude that we are strongly in a state of dollarization. The earlier we accept, the better.

To add salt to injury, there is this tendency to shatter the mirror simply because someone does not like what they are seeing. It will not work that way. The abolishment of trading in the fungible stocks of three counters, namely Old Mutual, PPC and SeedCo will not protect the currency from a freefall.

The overreliance on these selected stocks is evidence of caged investors who had been trying to exit the trap. To claim that such a move will not scare foreign investors will be deception of the highest order. Indeed, on the surface, we have good intentions at times, but the consequences continue to be unfathomable.
Of late, one of the government’s biggest shortcomings has been a lackadaisical approach to the need to correct or reverse poor policy prescriptions.

The insistence on exchange rate parity between the greenback and the Zimdollar was meant to facilitate the proverbial “bank robbery”, only to be discarded after foreign direct investment dwindled to levels never seen in recent times. Portfolio investment has literally vanished with the recent moves to short-change investors, as pronounced through monetary policy, a final nail in the coffin.

The arguments in the monetary policy statement were pointing to double dipping and lack of substantiated documentation as reasons to turn down some applications for funding under the legacy debt framework. Procrastination remains an albatross around the government’s neck. As we speak, a new round of defiance is alive, anchored on the insistence that the interbank forex market does exist, yet, in real terms, it is just a smokescreen to continue looting exporters’ funds and, before we know it, new exchange control regulations will be in place restricting the utilisation of free funds.

For now, the solution never lies in setting up infinite taskforces and committees which seem only committed to the next committees. What is the rationale of setting up a currency stabilisation taskforce in a market which already has too many monetary frameworks or structures which include the monetary policy committee (MPC), the RBZ board, the presidential advisory council has just joined the list of such monetary structures. Zimbabwe is possibly the only nation on earth where a presidential advisory committee—which I am aware only serves at the pleasure of the head of state—is dragged into technical monetary policy measures, which I believe a number of those committee members have no appreciation of. The establishment of the currency stabilisation taskforce is just a loud statement by Treasury and presidency to express lack of confidence in our central bank and its leadership, otherwise it is an unnecessary “animal” at this hour.

The overreliance on delegated legislations has reached tragicomic levels in Zimbabwe, birthing 258 statutory instruments in 2019 alone. It explains why even a currency which never was one cannot be trusted, modern-day economics certainly cannot promote currency which is introduced through delegated legislation. It is my firm belief that even if we are to have control over the broad money supply and the reserve money, our local unit will continue to tumble in nominal terms. This will be driven by apparent inability to deal with our resident economic confusion which includes simmering friction between the Treasury boss and the central bank governor, adverse expectations stemming from political noise as well as dilapidated infrastructure and populist policies.

The rate at which our central government is spending on subsidies can only bring one conclusion to a rational mind, the conclusion of continuous spending to satisfy such a gargantuan appetite. Recent references to justify the move have been made of the US being a big player in the subsidies space.

What a misleading and wrong way of comparisons given that US productivity levels, both for labour and capital, are so high to the extent that they create further jobs. In Zimbabwe, subsidies are introduced not to enable industry but to feed the vulnerable. To aggravate the situation, Zim has spread its subsidies, putting further pressure on the demand for foreign currency and creating cartels, some of whom are the biggest depositors in our banking systems. How on earth can 200 companies own 50% of total bank deposits when their capacity utilisation is averaging 25%?

The Finance minister’s preoccupation with scoring a “Jackie Chan” feat on the currency is unattainable. As much as he loathes the rate at which the economy is re-dollarising, he should equally dislike the rate at which we have backslid on both fiscal and monetary reforms, the goodwill by the international community has vanished and we have to learn to “crawl” again before we even contemplate running. A huge fiscal deficit is imminent for 2020, the inflation dragon will remain stubborn as long as we insist on mono currency, unaffordable subsidies the government is relying on are a clear path to push up reserve money, the flip flopping regarding the withdrawal of letters of credit as well as the gold facility or incentives are all but recipes for a poisoned environment which cannot support a currency.

Zimbabwe is far from having a currency crisis, it is akin to an unfaithful husband visiting a sangoma to understand why his marriage is faltering. The nation requires credible policymaking, strong and independent institutions which are not set to serve a clique of individuals but even a granny in Phelandaba or Magwegwe. We have a cohort of elites who are amassing unprecedented wealth as a result of the currency confusion which they created.

Some proponents are even pushing for the adoption of the rand, not knowing that the cancer is not in the currency but rather the policy discourse which ultimately gives birth to a currency. How on earth would you expect a currency born out of a statutory instrument to mature into a proper currency? Where on earth have you witnessed monetary measures being announced by a Treasury boss with the central bank only expected to deliver concluding remarks?

Where on this planet have you seen a government imploring citizens to pay their taxes in a currency which is different from the one they are advocating? The argument of “burning” money being the reason to allow traders who transact in the greenback to honour their dues in the same currency only holds if the same government does not believe in its reference exchange rate; if it did, there was never a problem as to which currency they would accept for tax settlement.

The idea of a dirty float or managed floating exchange rate is commendable, but we are clueless as to where we are moving from or the reference by the minister to the managed float is his confirmation that prior to that, it was a fixed exchange rate.

Investors cannot repatriate their dividends and, to add salt to injury, you then fix an exchange rate and woke up wondering on why the bloodbath of the local unit on the alternative cum “reliable’’ grey market.

The choice of managed floating path can only send signals of forex retention ratios which will be maintained at current levels or possibly revised downwards to allow the central bank to have a war chest to intervene in the currency market, that on its own can and will send signals of potential decline in export receipts for 2020 which will in turn put downward pressure on the exchange rate creating a cycle of an outright fixed exchange rate. Both current and capital accounts will take a knock which will expedite the redollarisation of the economy since the local unit will not hold.

Indeed it is my humble belief that the Zim dollar we are grappling with is a currency that never was, hastily introduced on the premises of fearing the greenback by the government more than admiring the local unit.

To avoid a catastrophe which will outweigh the Covid 19 virus, the government must listen to the market more than it wants to listen to itself, the degree of dollarising in this economy has surpassed 60% to the total economy size both formal and informal and facts on the ground are pointing to an economy which can only further dollarize. Only unparalled discipline on the monetary front through silencing the ‘’floods of money supply’’ coupled with unpleasant structural reforms on the fiscal front can halt this tsunami not the currency stabilisation taskforce or the unwanted

Mugaga is an economist and Zimbabwe National Chamber of Commerce chief executive officer. These New Perspectives weekly articles are coordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society (ZES). Cell +263 772 382 852 and email kadenge.zes@gmail.com

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