Mnangagwa using complex monetary policies to solve common sense challenges
The recent monetary announcement by President Emmerson Mnangagwa is an awkward attempt to use complex monetary and fiscal policies for challenges that should ideally be solved by using common sense.
The raft of measures is said to be a bid to promote use of local currency, nip inflation, stabilize exchange rate and deliver a remarkable standard of living to people.
In my considered view quite a deceptive detour of the challenges we face and really a pungent understanding of basic economics.
ED announced the measures himself by-passing the finance minister and the central bank governor. If the economy refuses to listen to the president, then truly the rotten egg will be right on his face. It is not a great idea and may be his advisors are trying to embarrass the office and person of the president.
The first republic president often reversed his ministers’ policies as the last man standing but this time the president has made himself the failure which should have only be associated with his two “technocrats”.
Turning himself into an economic technocrat is also a sure sign he has lost confidence in his minister and central bank governor because we expect the two to be employed to think.
If these cants take bold decisions and or announce them, they surely in my view have no purpose for an economy severely disabled like ours.
We probably become the first country to ban banks from lending money to their clients in modern economic history. It should be common sense that these policies will have a severe contagion effect on bank break even and or profitability.
Trying to solve a currency challenge by creating dysfunctional banks is not only extreme but shocking failure to understand inter relatedness of things. I can’t believe the central bank governor John Mangundya was part of this as he ran a bank holding company for many years and will know this basic fact.
My view it was better to have asked banks to report on actual use of the money.
The president should know that this “Nyika inowakwa newene wayo” mantra is enough common-sense explanation of the run-away exchange rate and inflation. The construction of dams, roads, airports, power plants and hospital though a great idea but it’s using a wrong financing model.
Long term projects are being financed by broadening the money supply(M3). Its common sense that this money supply cause inflation and the chasing of the real money from contractors cause major demand of currency and a decline in exchange rate. Long term projects must ideally be financed by long term finance.
The president and his party spokesperson, Ambassador Christopher Mutsvangwa both say the currency declines is caused by sabotage by industry players in cahoots with foreign countries to cause regime change. I don’t believe it.
Common sense to it is that a rigged foreign currency auction system create arbitrage opportunities and millionaires are being created.
These millions once created without any sort of work by the auction system and crony capitalism bank and invest in countries like South Africa and Dubai. It is easier to float the exchange rate not rigging it.
It must be known its not more laws that ensure stability and prosperity but consistency. The president’s advisors must inform the president that having more than two hundred statutory instruments related to fiscal and monetary policy in just one year causes speculation and outward looking investment by locals.
It also doesn’t really show we exactly know what we are doing when we have such a plethora of corrections of policy as exhibited by statutory instruments. We can’t be running the country money system using statutory instruments.
The president decreed more tax for transferring foreign currency with four percent (4%) IMMT introduced. It means margins for business have to add that percentage or more. This tax will cause price increases. It also encourages pillow banking and by extension making foreign currency to go even more underground. The tax simply discourage banking. This shortage will cause massive loss of Zimbabwe dollar value.
Our currency challenges will not be solved by increasing transaction costs but by exporting, production and giving people the confidence of banking any currency they so desire. The common sense will be to exorcise the Dr Gideon Gono ghost of raiding banks to increase such confidence. People with money haven’t forgotten the pain.
The president said the currency and inflation challenge is exacerbated by perception and speculation. It makes a lot of sense. However, the president didn’t address how the announced measures will increase confidence. Confidence only increases with better governance and systems at the central bank.
Its important people to note that the then governor Dr Gideon Gono killed even the smallest vein in trusting banks. The central bank therefore requires a person with a very different background and DNA in economics.
I believe we need local currency as it allows the central bank to use a number of instruments to spur domestic demand and exports. People may have no issue with currency but the people responsible to deliver it to us.
Unlike Afghanistan which scored on this our present regulators concentrate on small fish and leave the sharks. There is no finality, consistency, and credible enforcement. Our governance of money is murky and promote only crony capitalists. It’s not a good environment for a local currency.
Capital gains tax of forty percent (40%) of stock investors was made to suck appetite for speculative ZSE activities. However, with inflation at about hundred percent per month it is about nine hundred percent in the 270 days. So, it is still wiser to speculate more on the ZSE as the punitive tax is far outweighed by inflation.
Even if the punitive capital gains tax was to work there is no viable alternative for the people to invest their money to preserve value. It may mean moving to the parallel foreign currency markets further increasing its demand. After such a purchase of currency it will be pillow banked causing more currency shortages.
It would have been wise to float gold related tradable instruments to capture ZSE speculators. Gold is an alternative to US$ in most economies.
I don’t hold my breath on success of this presidential decree as it avoided common sense and rudimentary economic principles.
Brian Sedze is a strategy and tax consultant. He can be contacted on [email protected]