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Lockdown and economic responses

ZIMBABWE went into lockdown on Monday over the Covid-19 pandemic that has seen the United States, at 164 387 cases (at the time of writing, Tuesday), becoming the country with the highest number of confirmed coronavirus cases.

The Brett Chulu Column

There have been some policy responses by the Zimbabwean government pertaining to the Covid-19 containment attempts that have an economic impact.The entire spectrum of markets has also responded to the pandemic as well to the policy pronouncements.

Statutory Instrument 85 of 2020

On March 29, a day before the lockdown went into effect, government, through a Government Gazette (Extraordinary) (Statutory Instrument 85 of 2020), formalised the earlier announcement by Finance minister Mthuli Ncube that free funds (forex) can now be used in local transactions only in electronic form. Many commentators interpreted this as government re-dollarising the economy after government had vowed that it was not going back on de-dollarisation.

The semantics of dollarisation should not muddle our analysis. A top financial services firm has a useful classification of types of dollarisation. The firm defines dollarisation conceptually as any scenario where the local currency is widely substituted by a foreign currency either for the purposes of transacting or storing economic value. This means that even if a non-US dollar foreign currency such as the rand or pound or the Chinese yen were to substitute (by different degrees) our local currency, it would still be regarded as dollarisation.

According to the financial services firm, dollarisation can be classed into four categories: partial-official dollarisation, partial-unofficial dollarisation, full-official dollarisation and full-unofficial dollarisation. From 2008 to the present, Zimbabwe has experienced all the four types of dollarisation. Statutory Instrument (SI) 85 of 2020 has taken Zimbabwe from partial-unofficial dollarisation to partial-official dollarisation (conceptually similar to Zambia’s currency mix).

How did the markets react to the partial-official dollarisation pronouncement? A number of retail shops ignored the nuance that the forex transactions allowed have to be done electronically — they immediately began accepting cash forex payments at the till. The reference currency for pricing remained the Zimbabwe dollar. Some shops used the prevailing black market rates, while others were using the fixed rate of ZW$25 to the US dollar pronounced by government last week.
It is clear that these differing responses by retailers are creating arbitrage situations that can potentially be exploited during this crisis, potentially via organised networks of corruption.

By fixing the rate at ZW$25, government has temporarily chosen to lose monetary policy independence and stifle free foreign capital mobility.This is what we conclude from the well-known economic phenomenon called the trilemma or the Mundell-Fleming complex. It makes logical sense on Ncube’s part — banning the cross-trading of the Old Mutual, PPC and Seed Co fungible stocks conceptually infringed on free capital mobility — the default forced choice from the trilemma is to manage the exchange rate and lose monetary policy independence. So despite a showing of being in control of monetary policy, fixing the rate, from the trilemma tells us monetary policy independence is not possible.

Price, rate shocks

The Friday nocturnal announcement of a lockdown caused panicky reaction which saw shops being swarmed by desperate consumers attempting to acquire the necessities they could afford. On Sunday, the prices of several foodstuffs skyrocketed, especially vegetables and mealie-meal, increasing by at least 100%. This is totally unacceptable.

Our neighbour, South Africa, as part of its lockdown strategy, put measures to control price hikes through both moral suasion and criminalisation of profiteering. The informal traders have cleared from the streets and shops. With rates of Zimbabwe economy informalisation estimated at between 60% and 70%, coupled with the current mobility restriction, informalisation of retail is likely to find traction in homes, with a watered version of online shopping via WhatsApp taking root.

This potential development is also likely to create hotspots for ridicuolous price hikes due to low localised supply and overwhelming demand.
Black market rates fell from about ZW$43 to 35 to the US dollar in the wake of the lockdown announcement. This drastic fall could be an indicator of reduced demand as productive sectors scale down production.

Food security concern

A glaring weakness in the Covid-19 lockdown measures is lack of contextualisation and as a result the pronounced measures have not compensated for key economic risks.

Let me start with local food production. The horticulture sector is a key player in ensuring a regular supply of fresh vegetables to the Zimbabwean population. The bedrock of the horticulture sector is the seed and seedlings sub-sector. Maturing seedlings in the wholesale nurseries are increasingly getting difficult to find their way to farmers. We need to anticipate a serious shortage of vegetables in the coming months as farmers fail to re-plant.

Due to the closure of major vegetable wholesale markets, farmers are beginning to experience heavy losses as produce rots. That development will see the price of fresh vegetables skyrocketing in localities when the few farmers with the produce fail to meet demand.

There is another layer to the matter: information about exemption certificates has not efficiently circulated, with enforcement agents demanding exemption certificates from farmers transporting produce to the few distribution points allowed. This matter needs to be urgently addressed so that our internal weaknesses are prevented from unnecessarily creating a food crisis.

The other areas of food security concern that needs to be addressed is the right-pricing and availability of other basic foodstuffs and essentials such as mealie-meal, cooking oil, dried foodstuff, toothpaste, soap and medicines. What is needed is an information dissemination strategy on the availability and distribution of these essential commodities.

Information assymetry may result in artificial shortages being created. There is a situation of those in rural areas in need of medicines and other supplies — a rethink on mobility restrictions is needed.

Ncube’s ZW$4bn surplus

Countries like Rwanda are doing door-to-door deliveries of free food to all its citizens. Drones will continue to deliver medicines to the vulnerable in the remote areas of Rwanda. South Africa is supporting the SMEs financially and direct support to employees in order to cushion South Africans at a time economic activity has been severely curtailed.

Ncube needs to start using the ZW$4 billion surplus to give deepened support to Zimbabweans and businesses in essential services, especially food growing. We cannot hoard the surplus at this critical juncture.

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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