The dramatic rise in share prices on the Zimbabwe Stock Exchange, by more than 80 percent this year, and the growing black-market rate for externally-held hard currency or currency that can be externalised, now selling at a premium of 30 percent or more, are both danger signs that there is excess liquidity in the Zimbabwean economy.
A lot of those holding cash or near-cash, using the economists’ definition of cash rather than the bank notes of the man in the street, are twitchy and wish to lock their money into what they see as more secure assets or are speculators betting on earning money by shuffling paper rather than by producing goods and services of value.
The source of this huge gain in liquidity is well-known. The Government has moved since dollarisation from zero-deficit budgeting to issuing treasury bills to cover some expenditure with around $4 billion in such bills already issued. The bond notes are a near trivial addition to that total.
In many ways the issuing of treasury bills is a positive sign. The Government was on zero-deficit budgeting at dollarisation simply because no one with any sense at all would have been willing to lend the Government a cent then, and in any case Zimbabwe’s savings had been largely wiped out by hyperinflation. The Government has re-established a reasonable degree of creditworthiness and has been honouring in full its commitments made when issuing treasury bills, so retaining that regained trust.
Treasury bills have also allowed the Government, in the absence of other capital sources, to resume its old role of bankrolling agriculture, lending money for inputs that has allowed Zimbabwe’s farmers to take advantage of a good rainy season to produce a great deal of food, slashing import bills as well as pouring money from farm profits into the local and rural economies.
So long as the Government collects what the farmers owe, and so long as the parastatals and other agents handling the crop pay back what they received once the sell the crops to Zimbabwean processors or foreign buyers, very few economists can criticise the use of treasury bills to finance Command Agriculture. Good discipline and enforcement of contracts should mean that all the lent money will be available very soon to help finance the next season.
We also need to remember that the major problem in the early years of dollarisation was the exceptionally tight liquidity faced by many in business. Pumping some extra cash, economist cash, into the banking system was again a positive move.
The problem though is that some of the deficits funded by some of the treasury bills have been for recurrent expenditure or for spending that has not added anything to the production of goods and services in Zimbabwe and has not created a single job. Such expenditure is supposed to be paid for out of revenue, that is taxes and duties, not from borrowed money.
We are still some distance from a descent into disaster; the total in outstanding treasury bills is around a third of GDP. But the warning signs are there and we need to remember that Zimbabweans are still nervous about banking their money. They remember both the hyperinflation and the collapse of a number of banks that in retrospect should never have been licensed. The fact that inflation rates are still very low, although rising for imports of goods that cannot gain a priority for foreign currency, and that surviving banks are sound still does not overcome all fears.
We still have time to keep our economy in the light. The Government needs to be fairly ruthless in both keeping current expenditure below revenue and in ensuring that money borrowed for capital requirements and easily defendable economic programmes such as Command Agriculture is tightly controlled and carefully spent. All borrowing should ensure that at some stage extra revenue arises that can be used to retire the debts. But that is really the only factor that sets the limit. The high levels of discipline seen in the early years of dollarization that recreated credit worthiness need to be maintained in the more sophisticated economy of today.
We also need to give thought as to how we can minimise the speculation of those with too much cash for their own good playing the stock and currency markets and growing rich by doing little more than punching numbers onto a keyboard, hardly a productive activity.
At the same time the banking sector needs to think through how it can attract and secure savings. The ZSE surge is unlikely to be sustainable, and a necessary correction will help banks that have plans in place to offer a better alternative.
Nothing is seriously wrong yet, but the warning signs are there and we will ignore them at our peril.