Friday 3 November 2017

Zim marching back to 2008 meltdown


Terence Zimwara

Since the infamous 23 September 2017 weekend when prices suddenly increased, a sense of dejavu has permeated through entire communities since then. There is fear everywhere, consumers fear a repeat of 2007-2008 meltdown, businesses are bracing for a clampdown by the state while politicians particularly the ruling elite fear for their ‘careers’.
Amidst all the panic and frenzy some are now asking; how did we manage to get back to this position so soon? Perhaps to those that are ignorant of how the economy has been managed in the last few years, those ignorant of key decisions made in that period, yes events of that weekend came as a shock. Yet for those regularly following the path of the economy, the price hikes were not a surprise at all.
What simply started as successive budget deficits has ultimately resulted in a failing currency, a thriving currency black market and a collapsing financial system. Following the end of the government of national unity (GNU) in 2013, government abandoned the cash budget system in favour of a deficit funding. Later the country’s long running liquidity problems would reach a crisis point as government repeatedly failed to pay its employees on time. Businesses faced declining demand and ultimately, the liquidity problems began to manifest in the form of cash shortages.
Without a well functioning central bank to bail it out, government had to resort to treasury bills to fund its expenditure, a painless solution that would hardly the address deep lying economic problems. To date, it is estimated that government borrowings have surpassed the $1 billion mark. Meanwhile, the central bank which played a largely ceremonial role during the GNU sprang back to life after 2013 particularly when a new governor was appointed. Directives and controls were returned but this was not enough as the new governor had a more ambitious plan, bringing back a local currency this time under a pseudo name- bond notes. The new medium of exchange came into existence in late 2016, almost 10 years after the demise of its predecessor, the Zimdollar.
One has to acknowledge the spirited resistance to this currency prior to its launch. Many had feared that this was a premature decision that would return the economy back to hyper-inflation but the central bank dismissed this by giving fuzzy reasons why bond notes would be successful. We were constantly assured that the currency would be backed by an Afreximbank facility and that enough steps were taken to avoid a repeat of the uncontrolled printing of money of the 2008 era.
Sadly, currencies can only survive when people have confidence in them and it takes a lot to return confidence once lost. The nature of the debate prior to the introduction of bond notes suggested that people did not have confidence in the proposed bond notes. However, bond notes were the only way the central bank could exert itself in financial markets and that was one of the main motivating factors for their introduction.
When bond notes finally hit the market, the central bank declared that the new currency would be at par with US dollar. In the streets, the situation is different, the US dollar comes at a premium and that is how the multi-tier pricing system began. As the old adage goes, ‘bad money drives out good money’. The coming on board of the maligned bond notes marked the beginning of an informal withdrawal of the greenback on the market. It is getting close to a year now since bond notes came into existence and the US dollar has virtually disappeared in the formal economy, it is only the parallel market currency dealers that still have the dollar in substantial quantities. Currency dealers of course demand a premium and this premium reaches the consumer in the form of higher prices. When the premium goes up so do prices and that is how we got back here so soon!
The parallel currency market is once again the main influencing player in the economy, not government or the central bank. Businesses and consumers alike are now more concerned with the movement of the ‘exchange rate’ rather than pronouncements from the central bank. Obviously this is undesirable from the point of view of government.
So when events began to unfold towards the end of September, government’s response was predictable, arresting currency dealers and clamping down on businesses that hiked prices without ‘justification’. A statutory instrument was hurriedly issued to deal with illegal currency dealers and other elements that caused panic in markets. A few people have been arrested already but that seems to have caused a further depreciation of the bond note as currency dealers now demand an extra risk-premium.
Further price hikes and shortages, a thriving black market and more speculative activities are certain to follow. Government supporters will argue that the economy has not yet reached the level last seen in 2008. They point to an ‘improving’ balance of trade deficit, gold production which is higher than what it was in 2008 and of course they point to the bumper harvest of the last agricultural season. Indeed, the economy is in a better shape than what it was in 2008 but government opponents argue that the economy is on course for a repeat of 2008 unless the bond notes are completely withdrawn.
Whatever the case, it seems we have not learnt anything, Zimbabwe needs real economic reforms if it is to permanently escape the recurring cycles of recessions. True reforms are not a walk in the park, they are painful and they can potentially cause civil unrests or protests. For instance, when the government had trouble paying its employees in 2015 and 2016, instead of printing money to pay for its recurrent expenditure, an alternative solution would have been to reduce the workforce significantly.
A mass retrenchment like that will for sure cause protests and disruption of government business in the short-term, however over the long term, this will be the most practical solution that reduces the  current ratio of civil service salaries to government revenues. If that route had been chosen then perhaps the budget deficit would not have grown to its present levels.
Real reforms may take several years often longer than the country’s electoral cycles before the country begins to enjoy the fruits. So if the economy comes first, then the government of the day will not hesitate to pursue real reforms even if they might potentially result in an electoral loss! In fact, everyone must expect pain if true reforms are to be successful. Just like medicine which has a bitter taste yet it heals, real reforms are not going to be easy yet the sooner they are implemented the better the chances that the next generation from now will enjoy fruits of this generation’s pain.


 Terence Zimwara is a writer and commentator contact him on 0771799901 or tem2ra@gmail.com

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