eBusiness Weekly
. . . Donkeys are not cows
Clive Mphambela
Rapid price increases in the last few months have finally attracted the attention of policy makers, with the highest office in the land adding its voice to the rising debate. In the last two articles, we spoke about inflation and the currency conundrum. This week, as we attempt to discuss the issue of rising prices in the economy, it is pertinent to retrace our footsteps and understand the genesis of the problems and get to link the two. Rapidly rising prices are merely a symptom of underlying and deep seated problems in the economy. What are these and what are the possible solutions?
My thesis is simple. Even prior to dollarisation, the economy had real issues regarding inefficiency and undercapitalisation, not just within industries, but right across various sectors including the banking sector.
Dollarisation in 2009 only exposed these weaknesses. We not only realised that Zimbabwean companies were ill prepared to produce efficiently and cost effectively because of archaic machinery and the absence of new production technologies, but also that our financial system was also severely undercapitalised and thus ill prepared to finance the retooling of industry in a cost effective manner.
Despite the numerous policy interventions in various forms aimed at addressing some of these issues, problems continue to pervade the economy right up today. As long as we continue to window dress issues and apply cosmetic solutions without boldly addressing the root causes, we will never move forward but we will continue to dither back and forth.
Fortunately, there is admission that the investment climate in the country was toxic and Government is taking credible steps to address these. This is a good start.
However, we also need to go back to basics. For me the answers are rather simple but very painful. To get our economy working again we must necessarily take the following painful prescriptions.
Dollarise again or formally accept de-dollarisation.
This seems like a funny thing to say, but let’s just accept it, this is the only way confidence can begin to filter back into the economy. We are not fooling anyone but ourselves by continuing to self solace by saying that Zimbabwe is using a “multicurrency system”, which technically is dollarisation. We have introduced into circulation, the bond note, which is a local currency to circulate with a foreign currency, which has vastly different properties and attributes.
Let’s face it, even a communal farmer knows that if he has six donkeys and fourteen cows that sleep in the same cattle pen, every evening, when he is asked how many cattle he has, he will say I have fourteen cows, not twenty cows. Let’s simply stop it!! We must separate the cows from the donkeys.
My humble observation is that we are confusing the system by simplistically trying to force ourselves to call a donkey, a cow. The two are both forms of livestock, yes, but with very clearly distinct attributes.
My own position is that for confidence to return, both from foreign lenders and depositors locally, we need to take the painful decision to withdraw the bond notes from circulation. This should be done with due notice to holders so that people don’t lose value, but it should be done quickly. I would say a 90 day window is adequate.
Another school of thought that many colleagues in the economics profession posit, which I reluctantly concur with, is for Government to formally accept that Zimbabwe has de dollarised and we now have a Zimbabwe dollar.
This suggests that we should ring fence the current stock of deposits in the banking system as RTGS$, keep the bond note in circulation, and open new bank accounts into which only foreign currency is deposited. These FCAs then begin to rebuild the country’s foreign currency reserves. The stock of FCAs in the country will reflect in the growth of Bank Nostro balances.
Those who are in support of this argument say the major advantage is that all new foreign currency inflows will be properly recognised as foreign currency deposits with a clear distinction, allowing a farmer to state correctly and clearly that his “livestock balances” comprises six donkeys and fourteen cows, not twenty “donkcows”. It will allow significant volumes of mattress money that is being held in peoples’ homes to be freely deposited into FCAs which will not lose value. It will encourage remittance monies and export proceeds to come back into the formal system and be traded freely at a market determined rate.
I however have several honest misgivings with this strategy because it raises many fundamental issues. Firstly there are obvious accounting issues, like what currency do we then represent our business and asset values?
How do we deal with historical obligations and contracts which were in real US$?
What currency will current employment contracts be denominated in and so forth and so forth?
For the system to work. RBZ would also have to control strictly or even stop the creation of new RTGS$, either through Government borrowing or through normal credit extension by the banking system.
This will stabilise the money supply and therefore the exchange rate and prices in the economy. There will be a need to formalise the exchange rate through a market mechanism, recognise that different interest rates will need to be applied on loans and savings in local dollars and US dollars. The basket of complications is much wider than this.
The real meaning of multiple currency and why we now have price distortions in the real goods market.
The multiple currency system has been corrupted by the entrance of the bond note. This is why we even hear the Governor of the Central Bank, Dr Mangudya, and other senior officials from the Reserve Bank routinely now refer to “local dollars” and “offshore dollars” when they speak at various forums.
This is s subtle admission that local dollars, as represented by bond notes cash (ZB$) and RTGS$ as represented by electronic money and deposits in the banking system, no longer have the same value as real US$. This is a fact that is no longer deniable. By continuing our monetary experiment with the bond notes, we are doing the economy no good. Multiple prices will continue to subsist in the economy.
Bond notes are in my view not a good export incentive in the long run. They represent a penalty on exporters.
Bond notes are not an efficient export incentive tool. If anything they are penalizing exporters and rewarding importers who access subsidized foreign exchange.
This in my view will cause long term damage. In the short term yes an exporter will get a financial boost for his hard earned foreign currency by getting more bond notes, but with rapidly rising local prices, the bond notes will only buy less and less in terms of goods and services. In fact it’s not too long before exporters realise this.
Let me give a simple example to illustrate the difference between US$, ZB$ which are bond notes cash and RTGS$ to represent electronic money. Let’s suppose a gold miner who produces US$1 000 worth of gold sells the gold to the RBZ at $1 050 dollars(inclusive of the 5 percent export incentive) which paid as US$500,00 in hard cash and ZB$550,00 in bond notes cash. At this point the ZB$ and US$ are assumed to be of the same value, but in reality they are not.
In the real foreign exchange market, US$500 hard cash can be sold and it will fetch ZB$600 bond notes cash(20 percent premium), or upwards of RTGS$800.00 (60 percent premium) if the seller accepts an RTGS payment. When one works out the numbers backwards, turning the premiums into discount on bond notes, it follows therefore that the gold miner has in effect received less than US$1000.00.
In this example the exporter should discount the ZB$550 at the 60 percent premium to get to its true value in USDollars of US$343,75. This means the gold producer is not getting a 5% boost for his effort, but is selling his gold valued at US$1 000.00 at only US$843,75 ie (US$500.00 plus US$343,75). The market is very smart and as the discount applied on RTGS$ and ZB$ against real US$ rises, gold deliveries to the RBZ will necessarily decline. This example tells me what is likely to happen to exports in general.
Already, receivers of remittances from the diaspora prefer to get these in hard foreign currency cash as opposed to getting the money credited into their bank accounts where it will be immediately lose value. They are better placed to peddle the hard currency on the open market.
It is the existence of these multiple exchange rates in the economy that is causing uncertainty and price instability. Businesses want to operate in an environment that is reasonably predictable.
The bond notes have given business simply too many variables to manage. The opaqueness of informal foreign exchange markets also needs to be dealt with, not by throwing laws and legalistic positions at them but by coming up with sound market driven solutions and strategies which will bring the players who are in the in the informal economy into the mainstream economy.
The cash crisis is not because of liquidity problems in the banking sector, but rather due to excess liquidity and a confidence deficit in the economy!!
These are facts we have ignored for a while. Banks are actually quite liquid. Liquidity ratios are very high and the banking sector is operating at more than 60 percent average liquidity ratio. At RTGS$7.4 billion in total banking sector deposits, the money supply has shot through the roof and system is awash with RTGS$, or electronic money balances. It is not surprising therefore that the demand for cash is very high in the economy.
Until everyone switches to modern cashless transactions, wWe need between 15 percent and 20 percent of total money supply to be held in transactional cash notes and coins. This economy is operating at far less than this ratio. What makes things worse is that a significant amount of the cash notes that are supposed to be in circulation supporting commercial transactions are actually not in circulation as they are held by currency dealers either as Bond Notes or US dollars.
Money is therefore being traded as a commodity for its own sake as opposed to being used as a medium of exchange in the economy. This cycle can only be broken in steps, one of which is phased withdrawal of the paper bond note. Indeed there will be a cash squeeze in the short term, but in the medium term real cash, which has been pushed out of the system will slowly return to the formal market.
However for this to work, we need to not only put a cap on the creation of new liquidity, but perhaps explore ways in which a significant portion of the huge stock of unproductive RTGS$ money that we have created in the last few years can either be immunised or made productive in the quickest possible time. There is a misconception that banks sit on cash, banks actually disburse all the cash that they receive from depositors. It is the deposits that are not coming to the banks.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the writer is associated with.
