Grappling with symptoms hopeless 

Source: Grappling with symptoms hopeless – The Zimbabwe Independent October 5, 2018

Dumisani Muleya

FINANCE minister Mthuli Ncube and Reserve Bank of Zimbabwe governor John Mangudya this week came up with a raft of fiscal and monetary policy measures respectively in a bid to deal with the country’s deepening financial crisis and market volatility.

Editor’s Memo,Dumisani Muleya

Alarmed by government’s reckless consumptive spending which is fuelling inflation pressures, destabilising the financial system and further sabotaging the economy, Ncube and Mangudya moved in.

No matter what we think about their measures, they did the right thing: act. They were forthright about the problems the country faces, they provided facts, figures and statistics, and diagnosed the problem and came up with a prescription. But the question is: was that effective and will it work? Of course, it won’t!

Mangudya came up with the intervention to separate Nostro Foreign Currency Accounts (FCAs) and Real Time Gross Settlement (RTGS) — which also practically includes bond notes and mobile money transfers — accounts.

This was after protracted haggling about whether the United States dollar and bond note could be valued at par. The measure is underwritten by a US$500 million nostro stabilisation guarantee facility. Government has a history of raiding FCAs. The net effect of this intervention is de-dollarisation.

Mangudya also dealt with numerous other issues: lines of credit for strategic requirements; foreign payment transactions; purchase of fuel in Zimbabwe by foreign truckers in foreign currency; purchase of gold by jewellers in foreign currency; settlement of capital gains tax in foreign currency when using offshore funds; cross-border investment and offshore capital raising initiatives; introduction of statutory reserve requirement to mop up excess liquidity; issuance of Treasury Bills (TBs) through an auction system, continuation of RBZ savings bonds, construction finance facility, strengthening the monetary policy committee and capitalisation of banking institutions.

His policy measures were designed to boost confidence and transparency in the foreign currency market and to rein in inflation by combating rent-seeking behaviour and mopping up excess liquidity. The truth is that this is just damage limitation.

Enter Ncube. While he plucked far-fetched growth figures out of thin air, Ncube was also forthright on the problems buffeting the economy. He admitted at the heart of the crisis is the unsustainably high budget deficit. This has had a destabilising impact not just on the financial sector, but also on the rest of the economy.

Financing the deficit through domestic borrowing mainly using TBs, the central bank overdraft facility and cash advances, and arrears and loans from the private sector has crowded out the private sector, hence constraining production.

This has also increased money supply, causing exchange rate misalignment and inflationary pressures. Inflation was at 4,9% in August.

Similarly, the high deficit has accelerated ballooning of domestic debt from US$275,8 million in 2012 to current levels of US$9,5 billion against US$7,4 billion external debt. This brings total public debt to US$16,9 billion, which is well above the statutory limit.

Government’s RBZ overdraft was US$2,3 billion in August, again well above the statutory limit of US$762,8 million.

TB issuances have surged from US$2,1 billion in 2016 to a cumulative US$7,6 billion.

Ncube said macro-economic and fiscal stabilisation is critical and urgent. The intervention should invariably target the fiscal deficit and disequilibrium. A stable macro-economic environment is an essential precondition for recovery and growth.

However, Ncube’s most controversial measure was the 2% tax or two cents charge on every dollar for electronic transactions, from five cents per transaction.

This measure negates the growth narrative. So growth is off the table. The economy will contract further if the government continues on this course.

In essence, authorities are grappling with symptoms, not root causes of the problem. They need to do a root cause analysis before addressing the problem. Grappling with symptoms is unhelpful, in fact hopeless. Besides economic and financial interventions, political and structural reforms are needed urgently as part of a package of measures to overhaul the system. Political will is critical.