HomeAnalysisThe futility of policy measures

The futility of policy measures

Chenayi Mutambasere
DISAPPOINTINGLY yet again, the recent policy response is devoid of appreciation of the economic variables impacting Zimbabwe’s economy.

This is in spite of the fact that the minister of Finance Mthuli Ncube (pictured) made reference to a University of Zimbabwe econometric study of which he mentioned some of the key variables it identified were behavioural factors highlighting specifically confidence and inflation expectations.

Denoting from the minister’s comments, the economic variable factors are derived from endogenous activity.

The policy would have done well to assess the policy actions remediate against these specific variables.

In the last six months, both the Reserve Bank of Zimbabwe and Finance ministry including in some cases the Office of the President and Cabinet have been interfering with the market by way of sporadic policy announcements.

A study by Gallo and Otranto 2021, analysed the impact of the 144 central bank announcements during the Great Recession and found that policy announcements especially those unexpected can be responsible for bursts of economic volatility contributing significantly to key adverse economic outturn events such as Black Monday 8 August 2011 and ‘The Flash Crash’  6 May,2010.

There is vast research that shows the negative impact of unplanned policy announcements on the market.

It reduces investor confidence and creates a trust deficit which is harmful to the economy. Policy should be guided by forward thinking, futuristic budget-setting cycles that are accompanied by monetary reviews.

The policy statement has all the hallmarks of adverse government interference including use of lawfare to address the economy.  This is a very risky approach. The policy advises multi-currency law will be in place until the end of NDS1.

Economics research indicates that any economic policy positions must be responsive to business cycles in particular where there is indication of volatility inducing factors.

The Obama Stimulus is an example of a law that became unnecessary the moment it was announced but could not be addressed adequately as was placed as law.

Notwithstanding the stability President Barrack Obama contributed to the American economy, the fact that law fare economics was not successful in a more stable economy one can hazard a guess of its impact in highly unstable Zimbabwe.

Furthermore, Zimbabwe has areas that already are dollarising in response to market equilibriums, others close to the border having preference for Botswana Pula or South African Rands.

Therefore, it begs logic why such a law is necessary when the market is capable of determining the currency demand. Indicators suggest dollarising is what the market is determined.

The briefing statement also demonstrates awareness of arbitrage dealing resulting from multi currency.

It beggars belief that the policy advocate for multi-currency suffice to say that this will likely enable continued printing of money in local currency, which again will push further the demand of foreign currency a situation some may refer to as ‘Bad Money chasing Good Money’.

Another law being introduced in this statement is the absorption of the interbank exchange rate which will be used by all for all economic transactions.

While the statement suggests that this will be determined by the banks on a willing-buyer willing-seller basis, it is unclear what market infrastructure tools will be used to enact this.

Given there is no mention of the disbandment of the interchange auction, one assumes that this will continue to be the apparatus for exchange and for setting the exchange rate. Clarity is required on whether banks can now participate in the exchange market directly and not through the auction?

This lack of clarity will prove unpalatable for investors and as rent-seekers will either find a way to circumvent this law or will exit the market altogether.

Given the lack of savings in the economy, it is fallacious to suggest that the parallel market rate is a result of forward pricing. Consumption in Zimbabwe is driven by current demand, very few people are exchanging so as to sell in the future. Rather, money exchange activities are for of the purpose of meeting immediate needs.

The parallel market wherein the majority of transactions are undertaken signifies the prevailing rate on supply and demand equilibrium not on forward exchange.

This level of denialism creates a policy statement that fails to address the country’s economic needs.

By accepting that there is high demand for the United States dollar, it would enable the policy marker to undertake an earnest review and issue relevant policy statements.

Zimbabwe is an import backed economy that has high demand for foreign currency. However, the multi-currency status means that the majority with access to local currency continue to demand foreign currency to acquire goods and services on a daily basis.

It is this relationship between the local currency and the USD that continues to push up the parallel market rate which also leads to inflation.

The truthful admission from the policy statement is failure of government’s command agriculture policy, which only seemed to work in 2021.

The need to address shortages and mitigate food crisis through use of reserves and importations is indeed necessary for food security. State capture of market resources resulting in single buyer status, such as the Grain Marketing Board continues to cripple the agriculture sector.

Further, there is a lack of other agriculture market infrastructure mechanisms such as transport networks and border delays. This burden placed on government is a direct result incompetent agriculture development strategy.

Worth noting is that Ncube uses interchangeably the banking market rate and the Reserve Bank of Zimbabwe (RBZ) forex auction rate, implying that these are possibly synonymous.

The removal of levy on fuel prices calls for a peg on fuel prices while the policy suggests that fuel prices should not exceed US$2. The minister is not motivated to suggest a suitable range for fuel prices in Zimbabwe.

Levy discounts as a government subsidy only benefit the consumer if prices are adjusted to reflect, without this, there is yet another way for the taxpayer to subsidise corporate elites.

Government should undertake public consultation to agree fuel price ranges to minimise exorbitant profits by corporates on the back of state subsidy.

It is unfortunate that in addressing the civil servants remuneration, the policy points to exogenous factors eroding the purchasing power. This is contrary to the behavioural factors mentioned earlier.

Nevertheless, it appears that the importance of civil servants and their combined spending power is undermined by the fiscus.

Civil servants in a country with more than 60% unemployment rate are key consumers as their buying power can be a key economic stimulus.

However, they continue to be sacrificed with promises of recognition of being on the right pay grade from 1 July without mention of being back-paid what is owed from being on the wrong pay grade.

While there is a 100% increase in salaries there is no mention of inflation adjustments. Given the country’s high inflation rates this adjustment is necessary to maintain the purchasing power of civil servants.

This also applies to other benefits, such as payment of school fees, which does not include inflation tracking element.

Benefits such as loan guarantee scheme raises concerns, which are twofold. One being the basis upon which the government can guarantee housing loans – is this amount capped in any way given the current debt crisis the country is stuck in.

It would have been ideal to know the terms upon which government can guarantee housing loans for civil servant.

Additionally when coupled with the monetary policy statements, which highlight policy rate of 200%, what loan rate will be applied to the housing loans?

Given the abysmal salary increases it seems unlikely that the majority will be able to take up this offer if the policy rate is indicative of likely interest charges.

The overall assessment of this policy indicates an infringement on individual freedoms, wherein instead of being paid adequately, government would rather decide when you go to work and what time you return (bus transport), what you will eat (cafeteria system), where your children go to school (school fees allowance), where you will live (housing allowance) etc.

Underpaid civil servant underwhelm the local market’s demand for goods and services.

Overall, the policy statement is an entrenchment of what already exists rather than responsive and it is unlikely that any economic improvements will be observed in the foreseeable future.

  • Mutambasere is a development economist and technology architect  These weekly New Horizon articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society (ZES) and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). —  kadenge.zes@gmail.com and mobile No. +263 772 382 852.

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