By Richard Mawarire, Economist
Helicopter money/economics is a term coined by prominent economist Milton Friedman in his popular essays on the “Optimum Quantity of Money” in 1969. By way of a parable Milton Friedman supposes that:
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
The parable by Friedman above forms the basis of what is now commonly called Helicopter Money and most recently popularised by former Federal Reserve Chair Ben Bernanke through his Quantitative Easing programme.
The concept of helicopter money presupposes that when Central Banks are faced with deflation and a waning aggregate demand, one of the most effective tools would be simply to give everyone direct money transfers (increasing money supply).
In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target.
In this article I will trace how Zimbabwe’s own version of helicopter economics experiment went bad and the possible alternatives which can be pursued to stir the economy out.
The perfect deflation (2014 to 2016)
Smarting out of a period of double digit growth between 2009 and 2013 which was also characterised by relative political stability, the country hit a bad patch at the end of 2013 into 2014. From double digit GDP growth rate, the economy grew by a meagre 2% at the close of 2013 and this was to deteriorate to 0.8% at the close of the year 2016.
On the inflation front the economy started experiencing decelerating inflation, with the annual inflation rate below 0% from 2014 right through to the year 2016. The period was also characterised by poor revenue performance on the Zimbabwe Stock Exchange’s bluechip counters.
Delta Beverages for example experienced a cumulative 17% decrease in operating revenues in the years 2016 and 2017 on the back of decreased aggregate demand following a liquidity crisis and a wave of retrenchments epitomised by the famous Zuva Petroleum Supreme Court Judgement by Justice Chidyausiku.
Enter helicopter money!
Faced with massive deflation any good student of Milton Friedman would have resorted to the helicopter economics handbook when faced with an economy that was now characterised by negative inflation and declining aggregate demand. This is exactly what the Reserve Bank of Zimbabwe prescribed through a massive project of issuing government paper to finance government programmes in an effort to boost aggregate demand.
In an effort to stir the economy out of a depression, the Reserve Bank of Zimbabwe increased broad money supply (M3) by 30% from $4.77b to $6.20b between 2015 and 2016.
True to the Helicopter economics rule book the economy responded by registering a massive jump in the GDP growth rate in the subsequent financial year from 0.8% in 2016 to 4.7% at the end of 2017. However, despite the temporary success story, the situation created a new problem for the economy- exchange rate volatility and inflation headwinds!
Exchange rate volatility and inflation
Milton Friedman in his helicopter parable emphasises the fact that the helicopter money event “….is a unique event which will never be repeated.” In other words, Central Banks should only resort to this method as a “catalyst” to taking the economy out of a situation of negative inflation and declining aggregate demand. However as depicted above, the authorities kept on increasing the rate of money supply growth against a background of a flat GDP growth rate. The disproportionate relationship between money supply and the GDP growth rate resulted in too much money chasing too few commodities and hence the inflationary pressures and exchange rate volatility witnessed at the end of 2016 into 2017 to date.
The exponential growth in money supply as depicted above continues to lead the economy into a continued period of inflation and exchange rate volatility. This is primarily due to the fact that the real sector of the economy is not growing at the same pace at which we are injecting new money into the economy and hence the proverbial “too much money chasing too few commodities” with the attendant effects on the exchange rate and inflation.
Remedy out of the helicopter wreckage
Now that helicopter economics proved to have been such a disaster in the case of Zimbabwe, these are the possible alternatives that the authorities may pursue to arrest the attendant effects of helicopter economics on inflation and the exchange rate:
- Closing the tap on subsidies
Central to the growth in broad money supply is the fact that the government relies heavily on private sector borrowing to finance government programmes some of which are of a subsidy nature. Agriculture subsidies though noble at face value are the biggest culprit as the government sought to finance command agriculture. As an alternative the government should resort to private sector led funding initiatives that observe the basic tenets of a free market economy and are provided at optimum market prices.
- Reintroduction of the multi-currency
Zimbabwe has had a very bad history in terms of her fiscal and monetary policy management framework. The recent challenges on the inflation and exchange rate front come hardly 10 years after another financial crisis in 2008. The dollarization process in 2009 in which Zimbabwe abandoned its own currency for the United States Dollar and other currencies put to rest the menace around inflation and exchange rate volatility. Signs are beginning to show of most economic players choosing to benchmark their prices to the import parity equivalent in Rand or United States Dollar and this should be treated as a sign that the market prefers multicurrency as an alternative to a mono currency.
- Putting an end to domestic debt contraction
Rather worrying is the fact that the government has continuously relied on private sector borrowing to finance its expenditure. Since July 2019 when the treasury bills auction system was introduced, the Reserve Bank has floated in excess of ZWL$1.7b in treasury bills. Though the market has not entirely absorbed the full borrowing requirement of the government, these bills have a crowding effect on the market as the same resources could be deployed by financial institutions into other productive sectors of the economy by way of private sector loans which have a bigger influence on economic growth.
- Deepening of multilateral reengagement
Key to Zimbabwe’s recovery is the need for the authorities to double their efforts in the reengagement of key multilateral financial institutions like the IMF and the World Bank so as to unlock additional lines of credit and budgetary support which relieves pressure on domestic borrowing.
In this regard the government needs to continue with its efforts under the IMF Staff Monitored Programme and clear outstanding arrears with other multilateral financial institutions inorder to attract fresh funding. A low hanging fruit is also the need to deepen bilateral relations on humanitarian and climate related funding programmes as these are an easy avenue to attract the much needed foreign currency into the economy.
In conclusion despite the helicopter economics induced disaster, all hope is not lost as there is still room for the economy to recover if the measures recommended above are implemented.
Let the good times roll!
Richard Mawarire writes in his personal capacity. Feedback on [email protected] OR Whats App +263772242941