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Clinton Siniwa: Zimbabwe’s stimulus package: quantitative easing or fiscal dominance?

By Clinton Siniwa

In these extraordinary times the global economy is projected to contract by 3% according to the International Monetary Fund (IMF) due to the social and economic disruptions of COVID19.

Finance Minister Mthuli Ncube
Finance Minister Mthuli Ncube

As expected, governments across the world have made various interventions to deal with the effects of the plague.

Zimbabwe’s Finance Minister Mthuli Ncube announced a raft of measures he termed an “$18 billion stimuli package”.

He has been known to use very complex and technical terms to describe his policies and true to nature, he did not disappoint. He claimed the combination of measures would be in the form of quantitative easing.

Quantitative easing is generally an unconventional tool. It is used by central banks to increase the supply of money in an economy to lower interest rates and encourage lending. In functional economies, such measures tend to stimulate economic growth.

The Federal Reserve in the United States in response to the disruptions of COVID19 has cut interest rates to near 0%; bought government securities; made direct cash payments to citizens and loans to industry of more than USD 2 trillion.

The Bank of England (BoE) has also gone all in, literally. It has its own measures that include cutting interest rates and acquiring securities. The total economic value of the interventions amount to 9% of the UK Gross Domestic Product (GDP).

If what the Zimbabwe government is doing is similar to what other governments across the world are doing in response to COVID19, should Zimbabweans be cautious, or should they celebrate?

A few weeks ago, Gertjan Vlieghe a member of BoE’s Monetary Policy Committee made a statement that revealed the fundamental problems of Zimbabwe’s economy.

In explaining what the BoE was doing as part of its interventions, he showed how and why their efforts had a chance of being effective.

The bank’s foremost objective is to prevent the UK economy from slumping into a depression by achieving a target of 2% inflation. Furthermore, he reiterated BoE’s independence from Westminster. That is to say, BoE operate independently from the government of the UK. This is unlike our case where the Reserve Bank of Zimbabwe (RBZ) is vassal to the government of Zimbabwe.

Vlieghe’s explanations are an insight into why Minister Ncube’s stimuli package should be considered with reasonable suspicion. In simple words, quantitative easing could work where monetary policy is being used to control inflation to achieve economic growth.

Currently Zimbabwe’s inflation is over 934% year on year according to Professor Steve Hanke’s independent calculations this week. Such an abnormally high rate is evidence that both government and the central bank have no control over inflation. They have no device to stimulate the economy with.

There is also another important question to ask the learned Minister. How will increasing money supply without a corresponding increase in real output not increase inflation?

Many in Zimbabwe today may fail to understand the need for an independent central bank because of toxic conflation that has been cultivated by ZANU PF. The independence of state institutions is a key fundamental that must exist for separation of duties and powers in a democracy.

When the independence of a central bank is compromised the government just tells the central bank what to do. This leads to a state of fiscal dominance when fiscal objectives become more important than inflation objectives.

Fiscal dominance is when a country has a large government debt and deficit such that monetary policy is used to keep the government from bankruptcy instead of controlling inflation. It leads to hyperinflation and collapse of normal economic activity. It is public knowledge that the government of Zimbabwe has debt that runs into billions of dollars and that it operates in deficit.

The RBZ has been used over the years directly by ZANU PF governments as a vehicle to loot the economy. Command Agriculture, the RBZ (Debt Assumption) Act 2015 and Zimbabwe Asset Management Corporation are examples of grand schemes used by elites for gross wealth accumulation. The RBZ has many times refused to publish detailed lists of its creditors who owe sums that run into billions of United States dollars.

A further examination of Minister Ncube’s stimuli package shows a significant anomaly in the value of the interventions as a proportion of GDP when compared with other governments efforts. The US interventions amount to 10% of GDP while the European Central Bank’s interventions are at just about 7% of the eurozone GDP. Closer to home, South Africa’s stimuli package is just about 10% of its GDP.

If one were to crunch Minister Ncube’s numbers, based on World Bank GDP data on Zimbabwe; his stimuli package represents an intervention of 62% of GDP. This would be staggeringly impressive if believable. A very high percentage but of course, abnormal.

The recent expose by Africa Confidential of the leaked letter to International Financial Institutions presents more reasons to doubt the authenticity of the stimuli package. In his own words, the Finance Minister admitted Zimbabwe’s economy would shrink by 15% to 20% between 2019 and 2020.

In a rare show of honesty, he admitted there was need for eliminating quasi fiscal activities and elimination of direct lending schemes at the RBZ. The need to contain money supply growth was also highlighted.

However, it is not only economic reforms that Zimbabwe’s creditors want to see but political reforms as well. As the adage goes: capital is a coward.

This week social media has been awash with harrowing stories and visuals of the three MDCA activists who were recently abducted and tortured undoubtedly by state security agents. Who can write off debt and lend more money to such a rogue and unrepentant government? 

After the snub from International Financial Institutions the government came up with a homegrown solution. The Minister decided to tell us about quantitative easing as a response to the disruptions of COVID19! What the Minister actually meant to say was that he was turning on the money printing machines.

A member of the RBZ Monetary Policy Committee says the apex bank is being careful this time and will not exceed the set target of ZWL3 billion. He says this should amount to 10% of money supply in the economy. Whether this will be adhered to is highly in doubt given the recent history of 2008.

What is certain is that inflation will skyrocket into 4-digit values. The Zimbabwe dollar will exponentially plunge against the United States dollar. The currency kingpins will make super profits on the alternative market.

Savings and pensions are worthless; yet their value will decrease even further. The quality of life will deteriorate, more so for those without access to foreign currency. Misery, inequality and deprivation will be the outcome for the majority Zimbabweans.

It was John le Carre’ who said “… in the hands of politicians grand designs achieve nothing but new forms of the old misery…”

Clinton Siniwa is a UK based Chartered Certified Accountant. You can engage with him on Twitter @ClintSiniwa