Economist Eddie Cross explains why there is ‘financial chaos’ in Zimbabwe
These past two weeks we have seen the local currency crash, panic over the real value of our USD accounts with the banks and retail prices changing so fast the supermarkets could not keep up and simply started to price exclusively in USD. What is going on?
The first lesson is that we have learned very little from our recent history. Between 2000 and 2008, the Reserve Bank, faced with the near total collapse of the economy, started printing currency.
As they did the real value of our currency declined at an accelerating rate until in 2008, we were doubling prices every three hours. Why? That was clear when we were issued with notes with a face value of 100 trillion dollars.
The true nature of that situation was amplified when the same institution issued a one dollar note. It was like living in a lunatic asylum or a children’s playground.
Eventually, the people who had overseen this example of State stupidity, were forced to abandon our own currency and adopt the currencies of 6 other countries as a legal means of exchanging value in our markets.
In six months, we had totally dollarised. Goods were back on our shelves, prices stabilised and the economy recovered rapidly in certain respects.
I say “certain respects” because our productive sector did not recover and at the end of the GNU in 2013, we were still importing 70 percent of everything. We were a hard currency supermarket dumping ground.
Then, when the new Government came to power in 2013, the authorities started printing money again – not using paper this time but simply creating Nostro dollars out of fresh air using the Computer. This time, we suddenly had money, real money – by 2017 our bank accounts held US$23 000 000 000.
We still had some illusions of normalcy, our shops were full of goods and prices, although reasonably stable, were now showing disturbing inflation in US dollar terms – unheard of in the rest of the world.
Then another change of Government – this time twice in 8 months, the second time brought Mthuli Ncube in as Minister of Finance. After a few months in charge, he announced the unthinkable, what we had in our US dollar denominated bank accounts were not real dollars, they had been created and their real value was questionable.
He separated real US dollars from the fictitious dollars and called the latter “Real Time Gross Transfer Dollars” or RTGS dollars. Then he floated the latter and in 18 months our US$23 billion had shrunk to an estimated US$3 billion in real market terms. We were once again poor.
But our productive economy – our factories, our farms, our mines and the informal sector had started to claw back their position as suppliers – the local produced stock in our supermarkets crept up to 60 per cent, imports shrank.
We were suddenly more self-sufficient because the weak local currency gave our people buying power which could not be met by imports.
After 20 years of negative growth and collapse, we were suddenly creating jobs and a surplus on our balance of payments was emerging as our export earnings began to exceed our imports.
We looked good and on the fiscal front we were not only paying our way but operating on the basis of an excess of income over expenditure by the State.
The only problem was a rogue Reserve Bank and poor management of our monetary situation. The currency is the life blood of any economy and if you mismanage this aspect of national policy, it actually undermines everything. A bit like National Leukaemia.
We were completely isolated from the global financial system and to remedy this our Central Bank began to over reach itself to help meet the essential needs of our growing economy.
We had a rapidly growing gold industry, dominated by the hundreds of thousands of our people who had found that they could mine gold near the surface and make a living. The Reserve Bank held a monopoly on gold buying and started to print money to buy gold – perhaps in the mistaken belief that they were getting the gold at a 40 percent discount because the local currency involved was created on a computer in the Bank.
Work it out, on 30 tonnes of gold a year, purchased with 40 per cent in local currency, that is US$840 million real dollars – multiply that by the value on the auction of – say 2000 to 1 and the bank is printing Z$1,680 trillion dollars.
Then there is the retention system for all hard currency earnings – 25 per cent of exports and until recently 20 per cent of hard currency earnings on the formal market retails sector. If we say this was about US$300 million a month, at 2000 to 1, that is an astonishing Z$600 trillion RTSG dollars per month! Whatever, the Bank has been doing in reality, those two operations would explain the 500 per cent increase in money supply in the past year. What we know from statistical analysis is that inflation is about 1:1 with money supply. The evidence is that this has been accelerating in recent weeks.
In my view it is the issue of money printing at the Reserve Bank that is the primary cause of the recent collapse of the local dollar. However, there are those who have pointed to the payments by the Treasury as another cause. No doubt this exacerbated the situation because anyone getting large payments in RTGS from the Government would want to get rid of them as quickly as possible and they would most often turn the money market and buy USD.
The response by the State to this chaos has not been pretty. Conventional advice would be: –
- Stop the Reserve Bank buying gold altogether, clean up the industry and allow the private sector to buy the raw gold from producers, refine it and sell it on international market.
- Stop all retentions by the Central Bank. But require exporters to liquidate their earnings on the Interbank Market at a market driven exchange rate within 7 days.
- Use the local dollar as the sole means of exchange on the domestic market for all transactions include taxes and levies.
- Lift exchange control on current transactions.
- All regional States follow the above rules and have both price and currency stability.
Instead, we have had a mis mash of policy changes which do not seem to have been able to bring the situation under control. “Dollarise” the pundits cry, but that is not the solution. If we did, it would cripple our domestic economy, destroy jobs and our Government could not maintain salaries at present levels.
However, what they did this past week, for the first time might have the desired impact on the money market. Right now, we have about US$2,3 billion in our bank accounts, but at present exchange rates, only US$150 million in real value of all RTSG balances. We have hard currency surplus in our balance of payments. Put those factors into a real open market and it is difficult to see anything other than a significant strengthening of the local currency next week.
To support that possibility, I am told the shadowy money market operators on the street and behind closed doors are trying to get rid of their RTGS balances. All I can say is watch the markets, we may be in for a surprise.
Eddie Cross is an economist and former opposition Bulawayo South MP. He writes here in his personal capacity. You can follow his blog African Herd