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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