The Harare regime has burnt out all the local and international goodwill which came with the grand exit of Robert Mugabe, writes Ngoni Chihombori
On the 17th of February, 2020, the governor of the Reserve Bank of Zimbabwe (RBZ), Dr John Mangundya, issued the 2020 Monetary Policy Statement (MPS) whose theme was “Focusing on price and exchange rate stability.”
The goal of the policy statement was to provide the markets with guidance towards the policy objectives of the monetary authorities.
Having gone through the policy document comprehensively, unfortunately, the document does not point towards a success story as per the governor’s allusions. If anything, the MPS served as a confirmation that indeed, the wheels have fallen off and the economy is now cruising on auto-pilot, on the express lane to Armageddon.
I am yet to understand whether the monetary authorities genuinely believe in these proposed policy prescriptions, or whether the default mode is now to just continue kicking the can further down the road.
According to the monetary authorities, the RBZ is targeting a monthly inflation rate under 5%, with a corresponding annual inflation rate under 50% by year end.
According to Professor Steve Hanke of John Hopkins University, the Zimbabwe annual inflation rate currently hovers in the north of 540%.
After all is said and done, one very stubborn fact still stands out; the very rushed and thoughtless decision to reintroduce the Zimbabwe Dollar under prevailing conditions was not only premature, but also very misguided.
Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon.” The same conventional wisdom still holds true in the case of Zimbabwe.
While the governor would like to come up with all types of mumbo-jumbo on the various interventions they are putting in place to ensure exchange rate stability, it is not of much use to anyone when we fail to give a proper diagnosis of the root cause of the troubles bedeviling this country.
In simple terms, the source of all the inflation causing untold suffering throughout the country is right at the RBZ. According to official central bank statistics, there was c.$3.91 billion in total broad money supply in the economy at the end of the Government of National Unity in 2013. ZANU-PF assumed full control of state apparatus after the 2013 harmonized elections.
When Prof Mthuli assumed the reins at Treasury in September 2018, there was c.$9.5 billion in total money supply in the economy.
This figure stands today at c.$35bn. Since the learned professor’s grand entry, over ZWL$25 billion dollars has been created out of thin air.
Even if one took out the c.ZWL $13.2 billion equivalence of transferable FCA nostro balances component, the Zimbabwe Dollar component of broad money supply grew by over $12.5 billion (132%).
However, over the same period, economic output as measured by the GDP over shrunk by c.12%. Other sources quantify this contraction at around 18% while Treasury estimates a modest 7%.
Despite the contraction in economic output, money supply still expanded by over 100% over the same period. As validation to Friedman’s words, at the core of the current hyperinflation is rapid money supply growth.
This excessive growth is a consequence of the cumulative monetization of fiscal deficits over years.
The deficits are effectively monetized through the excessive issuance of treasury bills and aggressive borrowing through the overdraft facility with the RBZ.
Foreign Direct Investment (FDI) tumbled by c.USD$458 million (64%) in 2019, compared against the 2018 FDI inflows. It is now starting to ring very loud and clear to Mthuli Ncube that no rational and good-meaning foreign investor would risk their hard earned resources by investing in a dysfunctional environment where the currency depreciates over 95% in 12 months.
An environment where by the simple stroke of a pen, Government can convert one’s real money into a funny “monopoly currency” without consequence.
The Harare regime has burnt out all the local and international goodwill which came with the grand exit of Robert Mugabe to the political dustbins over 2 years ago.
The Government cannot be trusted by international creditors, given its track record of grand economic mismanagement and complete disregard of rule of law and property rights.
As a result, the cornered Government is left with not much options but to depend on borrowing locally.
The highly decorated, Cambridge-trained professor has transformed into a modern day “Gideon Gono” whose main task is to juggle around however necessary to ensure the “skoro-skoro” keeps moving.
From his bottomless bag of casino economics tricks, the Finance Ministry honcho has introduced all types of financial engineering to no avail.
From the introduction of the 2% IMTT tax on electronic transactions, the separation of FCA nostro accounts, the subsequent establishment of the interbank forex market, the splurging of millions on the ZUPCO mass transit buses running on subsidized fuel, the establishment of subsidized retail outlets for civil servants, the operationalization of the recently proposed subsidized roller meal coupon system, to the introduction of proposed upcoming “garrison” shops for the security forces, it is evident that none of the interventions has yielded a sustainable solution to the sickly economy.
The RBZ governor also mentioned about the ongoing incorporation of the Reuters system to make interbank transactions much more transparent.
While this will definitely help in bringing transparency, it is unfortunately not enough to save the troubled currency. If anything, all these interventions are tantamount to applying mascara on a very ugly pig.
While the gullible majority might be deceived by the ongoing antics, one fact still remains; it is an ugly pig! No amount of makeup will save the Zimbabwe Dollar.
According to official figures, over the past 3 years, the average annual fiscal deficit of was c.US$2.05 billion.
The dire power situation
Taking a conservative position, and multiplying this figure by today’s interbank midrate of 17.94, we get ZWL$36.8 billion. With no plan in sight to address the dire power situation in the country which has seen industrial capacity utilization dropping down to an average 27%, it is going to be easier to push an elephant up a staircase, than for the incumbent monetary authorities to stabilize the exchange rate.
Throughout 2020, I anticipate an at least ZWL$36 billion expansion in money supply ceteris paribus.
This will take the exchange rate to at least ZWL$60: USD$1 by year end.
A recent study by Emmanuel Ntshangase, an MBA candidate at the Gordon Institute of Business Science, to assess the challenges faced by businesses operating in this volatile environment concluded that businesses were indeed suffering.
There seems to be no solution in sight and the fundamentals are only going to deteriorate further.
Businesses and individuals are desperately yearning for the immediate return to dollarization.
Ngoni Chihombori is an independent macroeconomic analyst based in Harare. The views expressed above are his independent opinions. He is reachable on firstname.lastname@example.org
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