By Charles T.M.J. Dube

IT is not about the liquidity crunch, but the fundamentals.
I am deep in conversation with the Central Bank boss Dr John Mangudya and we are in agreement on a crucial point; there is need for a change in mindset.
The Governor laments that people are wasting time arguing and debating about symptoms instead of fundamentals.
This Governor is smart and witty.
He wants us to start from the basics by understanding why we are where we are; the implications being that he acknowledges we are dealing with a problem economy.
Our local dollars (L$s) are more than our foreign dollars (F$s) and yet our currency is foreign denominated meaning that these should be equal.
He notices my blank face and continues to explain.
L$>F$, where L$ represents local bank balances with RTGS balances as proxy.
We are using somebody’s money and so what people claim to own in somebody’s currency must be equal to what we have in foreign currency, but there is disequilibrium.
For equilibrium, we will need to multiply either the L$s or F$s by a factor.
Our foreign currency represents what we earn through loans, exports and outside remittances or what we have earned already, which will be located in our nostro accounts, cash at bank vaults or notes in circulation.
Where do the L$s come from?
They come from Government expenditure which is higher than revenue by 113 percent every month, of which over 90 percent is consumptive/recurrent expenditure, plus legacy debt, capital expenditure and parastatals’ deficits.
How are these deficits financed?
These are financed through the issuance of Treasury Bills (TBs), which increase money supply and end up at the banks as L$s.
And yet these L$s will not be backed by foreign earnings.
Government spends US$240 million in salaries per month and these Government employees will go to the banks to withdraw their salaries and yet it is TBs or L$s and not F$s that went to the bank.
These L$s are at par with the US$, so we will be consuming what is not there in forex.
And yet the Reserve Bank with the only power over monetary policy has no control on fiscal expenditures and hence their intervention to affect the supply side through Bond notes issuance to incentivise F$s earnings through exports and Diaspora remittances.
The Diaspora incentive of five percent is split between the recipient and sender.
The Reserve Bank has also tried to address the problem through the promotion of the usage of plastic money; to let the money remain virtuous, decreasing pressure for liquid cash.
As Dr Mangudya spoke, my mind diverted to the money given to ZESA to settle its external debt and realised that this was introducing L$s and not F$s to settle an external commitment.
And yet there remained a ‘catch 22’ even if one were to be anti TBs.
Teachers will buy from Mohamed Mussa using US$s that came from TBs, and yet Mohammed Mussa would be without sales if teachers were not paid.
Teachers’ propensity to consume is very high, hence they will not ease the pressure on cash demand as they do not save.
Let the reader be aware that deficit financing through TBs is not peculiar to Zimbabwe.
Zambia and SA, among other countries, have similar if not worse problems and yet the problem does not manifest in the same Zimbabwean manner because they print their own currencies.
That is in fact how normal economies run with fiscal and monetary instruments.
Zimbabwe’s problem is that our deficit is monetised unlike in the case of other countries with their own local currencies.
And yet we have only two banks — PTA and Afreximbank — that currently give us loans because of sanctions.
How then would one also further address the problem of too much L$s chasing too few F$s?
l You reduce L$s through Fiscal consolidation, like reducing Government expenditure.
The question would arise: Why commit yourself to paying bonuses when you do not even have the money to pay the very salaries?
l Increase production to increase exports.
In this regard you would need good and consistent policy measures.
These include Ease of Doing Business; indigenisation; facilities/facilitation (like gold mining, Women Empowerment Fund, Cross Border Facility, Business Linkages facility, Youth Empowerment Fund, SI64, export incentives, among others).
l Need for quick wins to save forex
These would include measures that enable L$s to be used through more production to reduce conversion rate.
Our currency is very tempting as even foreigners want it and hence the preponderance not to bank it as it is considered more of an asset than a unit of exchange.
Foreigners come here because they want to sell in foreign currency.
With the US$ considered more of an asset than a medium of exchange which can be sold in place of commodities, rent-seeking behaviour ensues as indiscipline comes in the form of not banking cash, externalisation and corruption, among others, resulting in money not circulating due to externalisation and fear of losing it, especially in the light of seeming cash shortages which erode confidence.
l Thus, there is a need to deal with market indiscipline.
In this regard, the Reserve Bank gets to use the Bank Anti Usury Promotion Act, which forces all traders to bank money.
Thus, the problem of cash does not lie with banks, but has to do with fundamental challenges of market indiscipline and low productivity.
This calls for structural reforms and this should not be made synonymous with the infamous structural adjustment programmes, but addressing our own economic fundamentals including the Ease of Doing Business.
The pursuance of populist policies that lead to an economic cul-de-sac as opposed to pursuing structural reforms is probably more costly to the Party than taking bold steps that lead to buoyancy and regeneration of the economy.
The Party would never lose an election for addressing the fundamental structural problems of the economy.
The market is dry of both the Bond notes and US dollars with most banks recently issuing out Bond coins to depositors.
Where then are even the bond notes?
Non-Banking of Cash
Like the US dollar, even the Bond note is being kept as a store of value, while at the same time being used to buy money in the real market.
The Bond note has also gained currency in neighbouring countries because of its parity with the US dollar which makes it more stable than the neighbouring currencies.
Market Indiscipline
The $860 million cash we have can be broken down into US$100 million cash at banks, US$160 million in Bond notes, plus US$600 million in circulation would be sufficient for our purposes vis-a-vis the US$1,6 billion in RTGS, if it were not for market indiscipline.
From the above, it is very clear that we need structural reforms to build our economy, with cash shortages being only a symptom of the real problems.
In our next contribution, we will again try to revisit the same narrative we have stated in this current article and try and address all the other issues that could be bothering you with regards to the goings-on on the monetary side in preparation for the mid-term monetary policy review.
Questions will arise as to how Bond notes, constituting only a small percentage of money in circulation, end up in the hands of a few in sufficient quantities as to be real business assets used for viable trading both locally and in neighbouring countries.
We know for sure that in the period leading to the fall of the Z$, both our Reserve Bank and commercial banks were part and parcel of the market indiscipline in the typical if-you-cannot-beat-them-join-them fashion.
Could we be witnessing a repeat of the same scenario?
Who exactly is responsible for the supply of Bond and the US$ to the Road Port and neighbouring countries?
There has been speculation that these could be well positioned individuals in banks and the public sector.
Money is not just a medium of exchange.
It is also a unit of account, store of value and a standard of deferred payment.
The present discourse under the US$ regime has confined it to the availability of money as a medium of exchange, which tends to tie it to export performance, which is not wholly correct.
We have houses, stands and other assets which have value and yet seem to have been zerorised as all value seems to be linked to the export variable.
Our own economic activities accrue value even if such activities do not in any way relate to exports.
A child taken through primary, secondary and university institutions is an asset of value and product of value addition even if such a child is not exported into the Diaspora to earn forex.
My house is not part of the F$s and L$s which Mangudya, our Governor, is trying to balance and bring into equilibrium.
What then does this mean in our scheme of things?

  • This article was first published in The Patriot of July 6, 2017