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Lawyer Shava challenges chaotic forex regulations
Finance minister Mthuli Ncube

Opinion

October economic outlook: Official narrative versus grim reality

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AS 2020 draws to a close, two conflicting narratives of the Zimbabwean economy are current—not unusual in highly polarised situations. 

Tony Hawkins

On the one hand, the official interpretation, expressed by Zanu-PF politburo spokesperson Patrick Chinamasa, is that of a country “nearly out of the woods”, supported by Finance minister Mthuli Ncube’s claim that at the end of his three-year Transitional Stabilisation Programme, the economy has stabilised.

Central bank officials and ministers insist that the “fundamentals”—narrowly defined as just the budget and the balance-of-payments—are sound now that the foreign exchange auction rate has stabilised and inflation slowed.

To describe an economy with 570% annual inflation, 98% currency devaluation, double-digit GDP decline, three-quarters of the population living at or below the poverty line, more than half the population food insecure, and falling employment, both formal and informal, as “stable” is palpable nonsense. Minister Ncube, better known for his acumen as a mathematician and expert on algorithms than his economics or banking skills, cannot expect anyone to take his stabilisation claim seriously.

It is not surprising then that Ncube’s boasts are challenged by many in business, diplomats, non-governmental organisations, the media, foreign as well as domestic, academics, opposition politicians and the trade unions. In his paean of self-praise about his TSP, Ncube carefully ignores the fact that all of his programme’s targets have been missed. 

GDP, which was supposed to grow 27% over the three years to December 2020, has fallen more than 20%; inflation, targeted to average 5%, rose from 10.6% in 2018, to 255% last year and 570% so far in 2020. Also missed by huge margins were Ncube’s targets for exports, imports, government revenue and spending and investment. 

What crisis? There is no crisis

Three elements of the official narrative stand out. The first is official determination to ignore “real” economic fundamentals in favour of selected, distorted financial ones.

In the official narrative, GDP performance is not a fundamental. Nor are employment, wages, living standards, public sector service provision, or educational and health indicators. Only the budget and balance of payments qualify because both are in “surplus”. They are only in surplus because so much is excluded or treated off-balance sheet.

The second element is the selectivity exercised by officialdom. Monetary conditions, the RBZ claims, are best captured by reserve money, which is a mere ZW$14 billion or 10.5% of money supply. It is not a measure of monetary tightness as the RBZ claims, because since December 2018 it has grown 327% while money supply has risen 1 200%.

This focus on residuals—statistics which reflect what the authorities want the public to believe—is central to the official interpretation of the exchange rate “auction”, which is not an auction at all. The US$265 million allotted at the auction since June 23 is less than one month’s imports of goods. In the three months to August, imports were US$1.14 billion, so total auction allocations covered less than a quarter of merchandise costs, while ignoring US$100 million a month of so-called invisible imports—services of all kinds such as payment for software licences, dividend outflows, interest payments, insurance costs and foreign travel.

The claim that an auction that covers no more than 15% of international expenditures is a realistic, indeed accurate, yardstick of total forex market demand is plainly absurd. The truth—or what RBZ governor John Mangudya calls hypocrisy—is that demand is “managed” primarily through a system of import priorities that shut out a large element of market demand. The RBZ refuses to publish the total amount of bids nor does it try to explain how over three weeks in September, demand fluctuated in perfect sync with supply between US$21 million and US$31.6 million, but the rate barely moved.

When on September 22 the supply was raised 50% to US$31.6 million, miraculously demand increased by the same amount. This meant that it is the amounts offered and bought that “balance” the market, not the price (auction rate). Obviously, demand is being managed to satisfy supply at the rate “chosen” by the RBZ, not by the market.  Mangudya says that is hypocrisy. Others believe it is demand controls.

Moreover, it is not an auction in the real meaning of the term. The main seller, by far the government, tries to keep the rate as low as possible. Does a Dutch flower grower or Zimbabwe tobacco grower go the auction to sell for the lowest price?

So the RBZ forex sales are not auctions but an allocation system, designed to ration scarce forex while controlling the price. It has a secondary function too— namely price control. Because retailers are forced to price their products in both local currency and dollars at the auction rate, by re-pegging the rate at around Z$81 to the US dollar, the authorities hope to control prices. Clearly, this is not working—witness the 50% hike in electricity tariffs or the massive increase in medical aid subscriptions or internet and mobile telephony tariffs, which along with the impending wages explosion will have massive knock-on effects right across the economy.

Price controls never work, even when they are implemented through the backdoor or side window in the form of a forex “auction”. There is much more to inflation than the exchange rate. Key elements such as inflationary expectations, service charges of all kinds and wages, which are in catch-up mode, are major inflation drivers. 

There is a huge wage explosion waiting in the wings, because the poverty line of Z$17 500 a month for a family of five is six times the national minimum wage. Trade unions, teachers, nurses, university lecturers and employees right across the spectrum are seeking to maintain their real wages by demanding payment in real money—the US dollar, not the local unit.  

Don’t like the inflation rate? Try another one and see if it fits

In recent months, the authorities hit on the marvellous wheeze of measuring Zimbabwe prices in a foreign currency to ensure that the inflation rate falls. The primary task of a central bank in today’s world is to achieve low inflation—not in a foreign currency but in the local unit. The RBZ seeks to slow inflation by controlling reserve money—not in US dollars but in ZWL. So why is inflation measured in US dollars “blended” with the ZWL unit? 

The blended rate has huge shortcomings. How are the weights—USD versus ZWL— determined? Does ZimStat have any idea of the share of transactions in the two currencies, not to mention rand or pula in the southern half of the country?

One useful indicator is bank deposits—normally used to measure dollarisation. In the last year, the share of US dollars in bank deposits has more than doubled from a quarter to over 60%. Far from de-dollarising—as the government claims—the economy has actually re-dollarised.

The blended rate is also no more than a guess because the basis of year-on-year comparisons is unknown. It was illegal for much of 2019 to trade in US dollars, so how does ZimStat know what the US dollar prices were? 

The authorities have latched on to the blended rate because it allows them to show a much greater fall in the inflation rate, 421% blended as against 761% in ZWL terms. This is short-sighted. If prices are measured in US dollars, albeit partially, then employees and businesses surely have a cast-iron argument for demanding wages or setting prices in USD or at least in a blend with the local unit.

Illogicality and the strategy void

This plays into the third element of the New Dispensation’s economic policy: the strategy void. If the grand strategy is to de-dollarise, then why does the government facilitate and indeed use re-dollarisation in measuring inflation, in setting prices for government services, in a widening range of taxes and in the payment of Covid-19 allowances? 

The forex auction is not a long-run strategy. It is a hand-to-mouth tactic to ration foreign currency. There is no doubt that it is inhibiting investment and economic growth and needs to be abandoned when, eventually, the economy returns to some semblance of normality.

At the end of the TSP, there is no strategy in place other than the meaningless Vision 2030 whose targets will have to be abandoned as already they are years, if not decades, out of reach. A new development plan, the National Development Strategy, is being drawn up but there will be another void between the end of the TSP in December and a new programme which, if the transitional plan is any guide, will be little more than a wish list.

The missing bailout

At some point there will have to be an IMF programme as a precursor to debt restructuring and possibly debt relief, without which there will be no sustained recovery. That is not on the cards at present, for political as well as economic reasons. So long as the authorities insist that there is no crisis, then logically there is no need for IMF support.

In reality, the authorities must know not just that there is a crisis but that without a financial bailout. So long as they believe their own propaganda narrative the outlook is bleak. Government believes time is on its side and that it can sit out the “non-existent” crisis, but the numbers suggest otherwise. Poverty rates, unemployment, socio-economic and infrastructural decay, under-investment both private and public, debt distress, the brain drain—all of these are a reminder that endgame is on the horizon.

Today, per capita incomes—in constant US dollars—are at their lowest, barring the hyperinflationary collapse of 2006 to 2008, since the late 1960s and one-third below their 1998 peak. There is no economic strategy to reverse this long run trend. Government continues to believe that future growth will be driven by mining—hugely dependent not just on the pace but also the nature of global economic growth—and agriculture. 

This ignores the potential impact of climate change and global policies to curb carbon fuel usage. Government also believes in a back-to-the-past strategy of import substitution, which has long passed its sell-by date globally.

Unless and until this changes, Zimbabwe is set to underperform, living standards will stagnate, the young, especially those with good saleable skills will join the diaspora. The dislocations imposed by Covid-19 are a moment for economic policy reset, though few in Zimbabwe, either in government or business, acknowledge that reality. Unless and until the paradigm shifts, economic—and social—performance and wellbeing will fall well short of potential.

 

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