ZIMBABWE’S economy is, once again, in turmoil. Unrestrained government expenditure has rekindled inflationary flames, the country’s huge import bill continues to exert pressure on limited foreign currency earnings and the dollarisation project has long unravelled.
A raft of government subsidies has only made things worse – the subsidised goods are in short supply.
Also in short supply is truthfulness in policy-making.
At the heart of the current crisis is government deception, a make-believe currency and a fictional exchange rate.
President Emmerson Mnangagwa has committed to economic reforms. But this will amount to naught if his administration does not dispense with habits, including disregard for integrity in policy-making. The record isn’t inspiring.
When Reserve Bank of Zimbabwe (RBZ) governor John Mangudya announced plans to introduce bond notes on May 4, 2016, it was an attempt to resolve the shortage of bank notes. But, he couched them as an export incentive scheme backed by a US$200 million facility extended by the African Export Import Bank (Afreximbank).
The notes only came into being because the central bank needed to “mitigate against possible abuses of this facility through capital flight, this facility shall be granted to qualifying foreign exchange earners in bond coins and notes which shall continue to operate alongside the currencies within the multi-currency system and at par with the USD,” Mangudya said at the time.
Just why exporters, who mostly transact electronically, needed their incentives paid in bond notes is a question never sufficiently answered.
As it turned out, this was nothing more than a financial sleight of hand by the central bank. Just one of a litany of deceitful acts by a government which seems to delight in gaslighting the populace.
PARITY, A MYTH
Perhaps the biggest fiction government has sought to perpetuate, with disastrous consequences, is that the bond note is at par with the United States dollar.
By the time the bond notes were introduced in November 2016, electronic balances on the real time gross settlement system (RTGS) were being discounted by 10% when traded for physical US dollar cash. Predictably, bond notes would fare no better.
Even as inflation quickened and the country’s external position worsened, the authorities held onto the fiction of parity.
But businesses reliant on imports had a different reality. Firms failing to access foreign currency from the inefficient central bank allocation system resorted to the black market, where rates reached a peak of 1:7 in the first week of October.
This was after Finance Minister Mthuli Ncube and central bank governor John Mangudya effectively shorted the unofficial local currency, the bond note and electronic balances which are essentially miracle money created by government on its spending spree.
The central bank directed banks to separate hard currency from these problematic deposits, “to eliminate the commingling or dilution effect of RTGS balances on Nostro foreign currency accounts.”
This policy stance has precipitated a run on both RTGS balances and bond notes, whose value plunged dramatically on the black market, triggering price spikes in shops.
Days after being appointed to lead Zimbabwe’s much delayed economic reform process, Ncube told journalists in New York that, left to his own devices, he would employ a ‘big bang’ programme. He was, however, mindful of a “political collar or the politics of policy making which then slows you down.”
He did seem to be enjoying some latitude when he introduced a 2% tax on electronic payments as well as the ring-fencing of foreign currency deposits, a measure the market read to be the first key step in ending the RTGS/bond note – US dollar parity fiction.
Amid the currency turmoil that followed the policy pronouncements, Ncube looked determined to stay the course.
“Look at the RTGS exchange rate or the bond note exchange rate, the market is already saying ‘hey, these are not at par.’ I’m not about to argue with the market,” Ncube told a Chatham House audience on October 8.
It was not long, however, before he recanted, issuing a statement upholding the ‘parity’ myth from Indonesia, where he attended the annual International Monetary Fund and World Bank meetings.
“Government recognises concerns surrounding RTGS deposits, and we commit to preserving the value of these deposits on the current exchange rate of 1 to 1, in order to protect people’s savings,” Ncube said in an October 10 statement.
Although parallel market rates came off after Ncube’s statement and a central bank announcement that it had started to draw down on US$500 million credit lines to fund crucial imports, some analysts felt government had, once again, opted to kick the can further down the road in an act of political cowardice.
“Austerity measures don’t come with free lunches all over,” economist Brains Muchemwa reacted on Twitter. “The subsidies bonanza, from fuel to cooking oil, is not sustainable. Neither is it prudent to borrow offshore to subsidise non-productive consumption.”
Muchemwa argues for the removal of all subsidies, which currently include fuel, grain and cooking oil, as well as the floating of the exchange rate.
Clive Mphambela, another economist, disagrees on the exchange rate.
“While economists of various persuasions can disagree to an extent with the legalistic position of the central bank (on parity), the policy is in fact quite sound, as allowing RTGS to evaporate would be reckless and (could), in fact, prove disastrous to the economy,” Mphambela wrote in the BusinessWeekly.
The false parity has thrown up all sorts of ridiculous price distortions.
It costs more to buy a litre of bottled water than a litre of fuel in some Zimbabwean shops. Fuel is actually cheaper in Zimbabwe than in Angola, Africa’s number two oil producer.
This is because, at current ‘local currency’ prices, Zimbabwe’s petrol and diesel costs less than US50 cents per litre, when the exchange rate is factored in. In August 2017, Zimbabwe’s fuel import bill amounted to $107 million. It rose to $130 million in August his year, a 21% jump. Retail prices have gone up by up to 6% over the period.
For a while, a few years ago, Zimbabwe’s fuel prices were among the highest in the region. Not anymore.
Government, which says it’s now allocating $140 million per month for petroleum imports, is struggling to chase motorists’ demand for the hugely subsidised fuel, resulting in frequent stock-outs and long queues which have re-appeared across the country.
Zimbabwe has been here before. For many years, government subsidised fuel imports through the National Oil Company of Zimbabwe (NocZim). The subsidy, compounded by graft and mismanagement, left the oil parastatal in debt, estimated at US$160 million by 2010. While the fuel subsidy gave the illusion of ‘affordable fuel’ for motorists, the reality is that the country is still paying for that folly through the NocZim debt redemption levy, which was introduced in 2003.
To this day, consumers pay 8.2 cents and 2.8 cents for every litre of petrol and diesel, respectively, towards paying off the NocZim debt.
Moral of the story – there is no free full tank.
Nearly two decades after debt forced government to reluctantly break the NocZim monopoly, Zimbabweans are still paying for the subsidised fuel the parastatal inefficiently pumped into the economy.
The current largesse is being funded by exporters, such as large-scale gold producers who only get 30% of their sales proceeds in foreign currency. The rest is surrendered to the central bank, which pays them in RTGS, at the fictional 1:1 exchange rate. This arrangement is breaking the gold industry, because producers are, effectively, selling at a little over half the international bullion price. RioZim is taking the central bank to court over this.
The price hike tsunami that engulfed the economy after the currency pronouncement shocked many. Ever since, some dumbstruck consumers have taken to social media to share images of some goods whose prices have rocketed in the last few days.
A common one shows a 2.3kg pack of meat priced at $41.51. Another shows a $30.99 pack of nine toilet paper rolls.
These prices are shocking because they represent an average 300% jump in a matter of days. BUT these are not US dollar prices. They are ‘unofficial Zimbabwe dollar’ prices.
This reality is reflected in pharmacies and restaurants, among other businesses, which have adopted dual pricing, in US dollars and local currency.
The absurdity of insisting on the US dollar-local currency parity was recently highlighted by a coffee shop receipt which showed a mind-blowing 1,676.92 rand receipt (US$109) for 10 bottles of Minute Maid juice and three chicken mayonnaise sandwiches.
Last week, government intervened to stop a proposed 100% bread price increase. By any standard, a 100% price increase, just months after another 10% jump, is enough to induce shock. In reality, however, Zimbabwe’s standard loaf costs about 33 cents.
By comparison, South African bread prices have tended to track the rand rate against the US dollar.
‘CLOSED FOR RENOVATIONS’
Zimbabwean business executives, with notable exceptions such as Radar’s Ken Schofield, generally fear openly criticising government policies. Although oil manufacturer Surface Wilmar recently went public with hard-hitting criticism of the government’s economic policies, many Zimbabwean businesses still choose to bury their heads in empty shop shelves.
As panicky consumers rapidly emptied shops in a frenetic first week of October, many businesses failed to cope with the surge in demand as well as the currency collapse. Many businesses, including fast-food chain KFC, had no option but to close. While some establishments did openly announce they would close on account of the market upheaval, some, including a major supermarket chain, hid behind the ‘closed for renovations’ fig leaf.
Government’s deception, it would appear, has been outsourced to the private sector.
DEALS, DEALS, DEALS
If bond notes have caused the most damage to government’s credibility, its tendency to oversell infrastructure and investment deals comes a close second. Aided and abetted by an over-eager state media machine, government has drawn unnecessary derision, and pressure, for selling even exploratory agreements and memoranda of understanding as ‘mega deals.’ In the run-up to the July 30 election, Mnangagwa went into overdrive, playing up ‘investment commitments’, reportedly worth billions of dollars, as if they were actual investments. Now, as the economy tanks, a frequent question is: what happened to all those mega-deals?