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MOVEMENT FOR DEMOCRATIC CHANGE
SIX MONTHS OF GONOMICS
Gideon Gono is to be congratulated for bringing economics into the centre of public debate and for livening up what would otherwise unbearably dull fare that is churned out by ZTV. It is a great pity that there is such a gap between his smoothly delivered rhetoric and the economic reality on the ground, and that the private sector has been bullied into giving sycophantic applause rather than informed criticism. In his latest performance, the Governor went so far as to dub anyone who fails to give him their unquestioning support as lacking the adequate expertise to analyse the policy regime and to come to the conclusion that Zimbabwe is on what he terms the ‘full economic recovery route’.
This sort of outburst is symptomatic of the Governor himself losing confidence as he tries to contend with the increasingly evident contradictions in his policies. As any professional economist would tell him, indeed any first year economics student, in the 4 core areas of responsibility of a central bank the Governor’s approach has exacerbated rather than relieved the underlying problems. These 4 areas are (1) the supervision of the banking sector and the management of (2) the money supply, (3) interest rates and (4) the exchange rate. The remaining dozens of topics dealt with in his latest Monetary Policy Statement are not normally the preserve of a central bank, but perhaps serve the function of obfuscating the failings of RBZ in its core areas of responsibility.
If the statements in his maiden Monetary Policy Statement (MPS) in December 2003 are anything to go by, Governor Gono started in a much more promising fashion. Let us take each of the 4 areas in turn and evaluate what he has done in relation to what he said he would do in his December speech.
1. Supervision of the Banking Sector
In order to safeguard the stability and soundness of the financial system, and minimize distortions, the Bank’s supervisory role has had to, and will continue to be, strengthened. …..The message that this conveys to the market is that the curtain has been drawn against the era for the proliferation of weak, poorly managed financial institutions dependent on cheap and unlimited Central Bank credit (Dec MPS, pg 35-36).
When he took over at RBZ in December 2003, Governor Gono was rightly concerned about the state of the banking sector. But instead of giving the banks time to adjust, he precipitated a much greater crisis than was necessary. He did this by starving the market of liquidity, driving interest rates by the end of 2003 to as high as 1000%. This caused a number of poorly run banking institutions to default and other well run banks to be caught in the cross-fire when the cheque clearing system went into gridlock.
In January 2004, Governor Gono bailed out the ailing institutions through the Troubled Banks Fund, giving them 3 months to sort themselves out. Inevitably, however, when the 3 months were up, many of the problems were still there and in the meantime the Troubled Banks loans plus interest had ballooned into hitherto unimaginable sums. Whereas the Governor expressed horror in his December statement about the level of public domestic debt ($607 billion on 5 December, Dec MPS, pg 46), by July just one of the private defaulting banks owed more than this amount to the Reserve Bank. So much, as the quote above would have it, for the end of the “era for the proliferation of weak, poorly managed financial institutions dependent on cheap and unlimited Central Bank credit”. The banking crisis is by no means over. Further negative economic fall-out and appropriation of public funds for dubious support to private institutions, is in store for later in the year.
2. Money Supply
It is critical that fiscal prudence, as intended in the budget, be complemented by a tight monetary policy. To this end, the Bank will aim to contain money supply (M3) growth from levels around 500% by the end of this year, to below 200% by December, 2004 (Dec MPS, pg 8)
Under Governor Gono’s stewardship, the money supply was dramatically augmented in the first half of 2004 not just by the injection of hundreds of billions of dollars for the troubled banks but by $1,700 billion of ‘productive sector’ loans attracting a highly subsidised interest rate of 30% (recently raised to 50% - figures from July MPS, pg 83). The net result, as reported in the July Monetary Policy Statement, has been a very dramatic increase in the money supply, albeit that the rate has been reducing from 490% in January to 400% in May (July MPS, pg 72).
The increase in Reserve Money, which is a particularly important indicator of future inflation, between December 2003 and May 2004 was already over the target he had set for the entire year of 200%. On a year-to-year basis, between May 2003 and May 2004 Reserve Money increased by a staggering 875%.
3. Interest Rates
Pursue a dual interest rate policy which, on one hand: seek to encourage economic growth, while; on the other, fight inflation through discouraging speculative and consumption borrowing. In this regard, interest rates on consumption, speculative and other non-productive activities will attract unsubsidized market related rates (pg 19).
A dual interest rate policy is simply not consistent with a commitment to what the Governor characterises as his number one goal, which is reducing inflation. As the Governor well knows from his time as a banker, money is fungible. Providing $1,700 billion at 30% or later 50% frees up money elsewhere to be used for ‘consumption, speculative and other non-productive activities’. The increasingly intrusive attempts to control the use of the ‘productive sector’ funds is inherently futile.
As the Governor rightly said back in December, “we need to show sustained discipline and commitment to the programs that we undertake, and resist the temptation for policy reversals in the face of the inevitable pain of adjustment” (Dec MPS, pg 50), but his interest rate policy has been anything but predictable. Interest rates in the money market have been characterised by extreme volatility, veering from rates well above inflation, to sustained periods of nominal interest rates well below 100% with inflation of the order of 400%. Negative real interest rates provoke dis-saving, excess consumption, inflationary pressures and speculation. Evidence of the latest bout of such behaviour is the speculative mini bull-run on the stock exchange in June-July.
On interest rates,
as in other crucial policy areas, the Governor finds himself between a rock and
a hard place. He knows that positive
real interest rates are needed to conquer inflation and restore a coherent
incentive structure in the economy. But
he also knows that paying real interest rates on the national debt would blow
the budget out of the water. Despite
claims of budgetary balance from the Ministry of Finance, under the present
ill-conceived policies, domestic debt has mushroomed from $603 billion in
December 2003 to $2,040 billion on
The non-market solution that has been implemented is to compulsorily appropriate any liquidity surpluses of the banks and put these into Special Treasury Bills at rates of interest determined by fiat by RBZ. This creates a new form of distortion which down the line will have further adverse economic consequences.
4. Exchange Rate
We seek role
prominence, in the area of relative price stability at home, and the
preservation of the value of the
At the time of the announcement of the controlled foreign exchange auction, MDC expressed alarm at the idea of control, continued taxation of exporters through the 25% surrender requirement and the orientation to stabilising the exchange rate (as presaged in the statement above) rather than to ensuring export competitiveness. Our worst fears have been justified. The controlled auction has de facto been used to re-impose a system of import control more stringent than existed in the 1970s or 1980s. At the same time, the exchange rate has been systematically overvalued to an extent that has, by July 2004, destroyed the incentive to export in almost all sectors.
The lack of economic thinking behind these policies is a major cause for concern. The Governor points to the fact that certain export sectors – notably gold – have this year achieved much higher levels of export earnings, but chooses to overlook the fact that there has been no net gain to the economy. The level of gold production in 2003 is thought by industry insiders to be higher than in 2004. The difference is that this year the foreign currency has come through official channels and is thus subject to the control that this regime so clearly relishes. Last year the foreign currency was made available to the economy via the parallel market.
One year ago in July 2003, the environment for business was far more favourable than the situation prevailing when the Governor gave his July Monetary Policy speech. Inflation was at much the same level, but with the parallel market tacitly being allowed to operate by the authorities, exporting was a viable proposition and importers could access the capital goods and raw materials required for production. By July 2004, for an exporter adhering to the law the incentive to export was of the order of 40% below the level required for competitiveness (as measured by purchasing power parity), while importers have increasingly found their applications rejected in the auction system.
giving up exporting, but are also finding it hard to compete on the domestic
market (as evidenced by the calls for protection noted in the Minister of
Finance’s review). Both of these are
signs of an overvalued exchange rate.
Tacit acknowledgment of the contraction of export activity was given in the Governor’s July speech, but the reduction in the surrender requirement and marginal change in the floor rate to Z$5,600/US$ are not nearly adequate to restore export viability. The exchange rate implied by the revised gold support price of Z$18,000/gm is around Z$6,200/US$. This is still a long way from the PPP rate which by August 2004 is over Z$8,200/US$.
As of July 2004, the main success indicator that the Governor points to is the reduction in the headline annual rate of inflation from 622.8% in January 2004 to 394.6% in June 2004 (July MPS, pg23). Apart from the fact that ordinary people’s experience is of much higher inflation than is indicated by the official figures, a rate of inflation of around 400% per annum is still an intolerable burden on the economic fabric of the nation and on ordinary people. Inflation is often described as the cruellest tax of all on the poor, and unfortunately there are worse things to come for the most vulnerable in our society. Measured in month-to-month terms, inflation is rising again from a low of 4.9% per month in April to 6.0% in May and 9.2% by June 2004.
Inflation is an intermediate economic objective – the real goal is to create jobs and increase real incomes for Zimbabweans. Thus the economy will only have ‘turned the corner’ when sustainable economic growth is achieved. Regrettably, that prospect becomes more and more difficult every day that Zanu-PF remains in power. This is not just because of the contradictions in the macro-economic policies and the resultant contraction of export and import substituting activities, but because of fundamental flaws in the environment. Recovery is ultimately a question of confidence and this is impossible in a situation where, to take Kondozi as one of the most egregious examples, an indigenously owned business with EPZ status is nonetheless high jacked by rapacious members of the political establishment.
It is also
impossible for international support to be resumed under this government – any
other reading of the recent surprisingly harsh criticisms of the Mugabe regime
by the IMF is just wishful thinking.
Resumption of international support to