By Respect Gwenzi
LIKE the biblical Legion of Gallille, hounded by surging demons, which kept on multiplying, Zimbabwe’s reserve money supply, has posited the exchange rate, on a trajectory to abyss.
The variation between the two macroeconomic variables is inherently inverse and extremely sensitive. Where money supply in base form would increase, this would cause depreciation in the exchange rate.
The phenomenon is not new to Zimbabwe and is central to understanding pre-dollarisation history of the economy. It is during this lost decade of 2000 to 2010 that the Zimbabwean dollar (Zimdollar) not only crushed but was disbanded after being deemed valueless beyond redemption.
Before this era, we saw the effects of money supply surge kicking-in, as the government of Zimbabwe minted coins to finance its allies in the Democratic Republic of Congo war as well as compensation of Chimurenga guerilla fighters.
With political power slipping off the late former president Robert Mugabe’s hands as the MDC emerged out of labour and student movement, reactional irrational populist policies were adopted, resulting in the massive printing ofZimdollars.
Following this, on the fateful Black Friday of November 1997, the Zimdollar crashed by 75%. Fast forward to 2007, following a protracted economic crisis, the miniscule fiscal and monetary abilities of the government were again put to test, this time under a new governor, a very exuberant one. The modus operandi, as was the case in the past, remained the same.
The hallmark of Gideon Gono’s era is money printing to solve an economic crisis, a stance which former minister of finance, Tendai Biti likes to call Voodoo economics.
In-deed this method defies conventional economics and is tantamount to magic or similar spiritual miracles. The unapologetic former governor recently scribbled a thick volume defending his tactics while in office, as similar to the measures later taken by the United States Federal Reserve System (Fed) and the rest of the developed world, of injecting liquidity into their economies following the global crisis of 2008.
The governor insanely believes that these nations actually copied his script since he had pursued it three years earlier. Given the varying outcomes between Zimbabwe and the US and Europe, it is clear that although the two scenarios were indeed crises, there was some differences in underlying economic conditions.
The other nations had gold and forex reserves, which could be utilised to cushion the currency as they adopted hawkish monetary policy stances, but Zimbabwe had none.
Further, these economies were not experiencing excessive inflation, had low debt levels, were open to international capital and had strong BOP positions. The governor simply chose to omit these facts in his review of his and Zimbabwe’s hounding past.
World over Zimbabwe is a case study of failed economic policy, particularly on the monetary front. The lack of trust in financial institutions and low confidence in the currency in the present circumstance is a clear reflection of the traumatising effects of inflation and a moribund currency of yester-year.
The challenges on the fiscal and monetary fronts are not only a thing of the past. In 2014, when the ruling Zanu PF party reclaimed full control of government, the monetary policy was tweaked to achieve political expediency and as in the past, the RBZ was again put to task, this time under yet another governor.
There was little resistance from the governor and soon government issued Treasury Bills like it was Father Christmas. The balance outstanding Treasury Bills as at August 2018 was at US$8,2 billion, a figure almost equivalent to the country’s overhanging external debt.
The TBs debt above was accrued in a record four years. Again, a new governor, John Mangudya, had failed by consequence of association.
The government of Emmerson Mnangagwa, which came to power in 2017, promised to right the wrongs of the past. Mnangagwa assembled a team of untainted bankers to manage the national purse, uncharacteristic of his dethroned former boss, who was used to deadwood reshuffling of unqualified cronies.
This revived an iota of hope on the strained nation, long in the wilderness and just turning, the biblical, 40 years. It is clear that Mnangagwa believes in conventional economics based on the performance of the economy on both monetary and fiscal fronts, from the time he took over to date.
Because of this belief, the fiscal and monetary authorities have been more emboldened in their quest to reconfigure the economy. The major challenge with the authorities has been that of using wrong underlying assumption in evaluating the status of the economy.
This has led to a prescription of wrong policies to drive the economy forward. For an example, after projecting an economic rebound for 2021, the Monetary Policy Committee, which falls under the purview of the RBZ and the Treasury, hawkishly presumed that a base money supply growth of 25% per quarter was ok.
Notwithstanding the compound effect, the presumed growth is disproportionate to the envisaged economic growth. A 25% growth in quarterly money supply would have resulted in year end base money supply level of about ZWL$40 billion (50%). That would have been shockingly inflationary.
The absolute Gross Domestic Product (GDP) numbers already speak for themselves. A GDP of US$14,5 billion, growing at 7,5% will add less than US$1 billion or ZW$85 billion in actual produce, this gives a ratio of 25% to GDP growth factor.
The economy itself is expanding disproportionately, with the biggest jump in Agriculture, this means the absorption of liquidity is not even and often the excess ZWL liquidity is channeled towards risk aversion and crystalised through forex buying.
However, the latest five weeks money supply trend brings out an important phenomenon. Mangudya is perhaps on a path to redemption, and in line with the first assertion of this piece, he too is exorcising the demon of monetary instability through prudential monetary policy management.
Data shows that money supply is retreating at a proportion never seen before. From a highest of ZW$29 billion in September, base money is now below ZW$25 billion, having closed the week ending October 29, 2021 at ZW$24,4 billion.
Base money supply started the year at about ZW$20 billion and at current levels the year to date growth is barely 23%.
This is a sustainable trajectory which has been achieved through a cocktail of measures including liquidity mop up via NCDs and aided by a tight fiscal stance.
The dangers ahead are however paramount as elections linger. The propensity to issue currency is very high, given the tight political race ahead and the austere background, which has reduced the generality’s hope in the current government.
If Mangudya maintains the current stance of monetary tightening and skips the hurdle ahead, which will help the country’s troubled currency stabilise, despite the tilted odds, he will go down as Zimbabwe’s most inspiring Central Banker of all times.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org