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Why Mnangagwa has failed to improve the economic prospects of Zimbabwe?

by Martin
21 Nov 2019 at 21:03hrs | Views
It is now more than two years since President ED Mnangagwa assumed power with an ostensible mandate from his backers to improve the country's economic fortunes, the nemesis of his predecessor, RG Mugabe. The reality on the ground, however, is that the economy in all objective measures, is in a worse position than when President Mnangagwa assumed office. With all the goodwill that the Mnangagwa administration initially received internally and internationally, why have all the efforts to bring life into the economy all but failed, to the extent that many now strongly believe we are staring conditions similar to the 2007 economic implosion? Where has the Mnangagwa administration gotten it wrong?

The role of the Reserve Bank of Zimbabwe

On the economic front, the single most important reform element that the new Mnangagwa government desperately needed that would have immunized the country from ever relapsing to the hyperinflationary scourge of 2007, was the policy reform of the operational mandate of the Reserve Bank of Zimbabwe (RBZ). The RBZ's operational mandate needs to be aligned to international best business practices if the country is to cease being the "economic black sheep" of the region. All efforts by the Mnangagwa administration to turn around the Zimbabwean economy will be futile and of no effect, as long as the RBZ's operational mandate maintains the status quo.

All the economic challenges the country is facing can almost all be traced right onto the door step of the RBZ. Fresh memories from our recent economic history vividly confirm that the country's economic fortunes are in a way directly tied to the operations of the RBZ in the economy. The more the RBZ gets involved in the Zimbabwean economic landscape the more the macro-economic conditions have worsened. On the other hand, the country's economic fortunes have improved at a time the RBZ had very limited roles to play in the economy. At the height of the 2007 economic implosion, the RBZ had virtually taken over all key aspects of the Zimbabwean economy, from financing all government operations, procuring all key imports, providing funding to companies, to selling products in short supply directly to the public under the so-called BACOSSI programme. The economy worsened with each new measure taken by the RBZ towards more direct involvement in the economy. By the time the new Government of national Unity (GNU) was consummated in 2009, the government was bankrupt, with only USD5 million in its coffers, and the currency managed by the RBZ, the Zimbabwean Dollar all rejected by the market.

With the GNU economic policy position anchored on the dollarization of the economy, the RBZ became a ceremonial central bank, only existing in name. It was during this period of hibernation or total inactivity by the RBZ in the local economy, that Zimbabwe recorded the period of the most rapid real economic growth since independence, albeit from a low base. The 4-year period from 2009 to 2013 registered average real economic growth rates of over 8% and the country ran balanced budgets and surpluses over the period. Inflation was close to 0% and there were no forex shortages to pay for fuel, electricity, wheat and other essential imports. There were no USD physical cash shortages, with ATM's dispensing up to USD10 000 notes in a single withdrawal.

The end of the GNU in August 2013, came with the resurgence of the RBZ. The RBZ quickly reintroduced exchange controls and the allocation of foreign currency for so-called key national requirements, it invented Bond coins and notes and legislated par value for Bond notes to the USD. The more the RBZ extended its tentacles into the economy, the more the economic gains of the GNU period were quickly eroded and reversed. Once again forex shortages became the order of the day and the notorious fuel queues resurfaced. The reversal of economic fortunes culminated with RG Mugabe being recalled by his party, and one of the main accusations levelled against him was failing to manage the economy with too many "criminals" around him.

The new Mnangagwa government continued to empower the RBZ, which to this day, has reverted to an exact mirror image of the 2007 Gono led RBZ. The RBZ now funds command agriculture outside the fiscal budget framework, controls most of the forex generated through the so-called "surrender requirements" from exporters, provides forex for fuel, electricity, wheat and other critical imports. By the time the Finance Ministry suspended year on year inflation reporting in August 2019, we were already stuck in the most painful and notorious economic condition, it's called stagflation! Official recorded of inflation of 78% and a negative economic growth rate of -6.5%, a double whammy of economic pain. We now have the second highest inflation in the world after Venezuela. Countries at war, Syria, Somalia, Afghanistan are doing better.

RBZ is a direct extension of the government

Bold reforms of the operational mandate of the RBZ are urgently required if the Mnangagwa administration is to turn around the Zimbabwean economy and usher in a new era of stable macro-economic conditions necessary to usher in direct domestic and international investments, sustainable economic growth, employment creation and poverty reduction. The government should take advantage of talk of a constitutional review, to bring in reforms of the operational mandate of the RBZ at the constitutional level. The best business international practice is to legislate the independence of the Central Bank at the constitutional level. In south Africa, the Reserve of South Africa (SARB) is a constitutional Chapter 9 Institution, with its operational mandate and independence guaranteed by the constitution. The RBZ is governed by a mere act of parliament, which can easily be twicked and changed to suit short term political agendas.

According to the IMF country representative to Zimbabwe; Patrick Imam, "The Central Bank (RBZ) is a mirror image of what the government does". In other words, instead of the Central Bank helping to contain the negative effects of overspending by the government and reduce overall damage to the economy, the RBZ acts in tandem with the government and magnifies the problem instead of helping to contain it. According to the report by the Auditor General, in 2017/18 fiscal years, the government spent USD3.2 billion on Command agriculture outside the fiscal budget framework. The RBZ facilitated this expenditure by creating liquidity in RTGS Dollars that increased money supply by 86%. If the RBZ had an independent operational mandate, and the government would have been forced to source the USD3.2 billion on the open market, interest rates would have shot through the roof, protecting the local currency from further depreciation and punishing the government's irresponsible spending through high borrowing costs. This would have protected the value depositors' cash and capital deposited with banks.

A very good example of how an independent Central bank helps to contain and cushion fiscal mistakes committed by the government is that of the SARB. The south African government via its 100% owned Eskom, racked in R450 billion of new debt as Eskom was building its two new power stations and costs skyrocketed beyond initial budgets. Some gullible politicians then proposed that the SARB take over the Eskom debt, in other words, monetise the debt. If the SARB was not independent, then they would have been forced by the government to print R450 billion of new money to pay-up all Eskom debt holders. The immediate ramifications would have been a massive spike in inflation and steep depreciation of the Rand as money supply shots up through the roof. If the SARB was not independent, South Africa would be in similar economic territory as Zimbabwe, only an independent Central Bank has been the saviour.

The RBZ is not providing the necessary cushion to government irresponsible spending, instead the RBZ facilitates government reckless spending and hence magnifying such effects onto the economy, this explains the current hyperinflationary conditions, the massive depreciation of the new Zimbabwe Dollar, forex shortages and the concomitant economic recession. The economic situation will get worse as long as the RBZ is a direct extension of the government, with no institution in place to provide a cushion for irresponsible government expenditure.

Essential and urgent Central Bank reforms
The following reforms are urgently required to change the governance and the operational mandate of the RBZ to ensure sustainable macroeconomic stability in Zimbabwe and arrest the recurrence of hyperinflation, forex shortages, deep currency depreciations and mass unemployment.

I.    Craft legislation for an independent Central Bank at the Constitutional level
The Minister of Finance must immediately initiate new legislation for an independent Central Bank with the sole mandate to maintain the value of the local currency and the stability of prices in the domestic market. In line with international best practices, the Central Bank will follow a targeted inflation regime, where it sets a publicly known inflation targeted range that must be maintained at all costs. The SARB maintains an inflation target of a CPI rate between 3 and 6%. If inflation breaches the upper limit, the SARB is forced to increase interest rates to tighten money supply growth until inflation falls back into the targeted range.

A Central Bank which is not independent can bring most harm to an economy. The RBZ in its current operational structure, has the power to divert all goods and services produced in Zimbabwe to certain individuals or sections of society by simply increasing the quantity of money, albeit, at a cost of very high inflation. Capital formation or investment (a necessary precursor to economic growth) cannot happen without savings since people are discouraged from saving when money is losing value fast. Instead, high inflation drives up consumption to the detriment of savings. This discourages wealth creation through direct local and foreign investments and explains the negative economic growth rates and high unemployment levels we are currently experiencing.

II.    Scrap the surrender requirements from exporters and the RBZ and government must source forex on the open market
The RBZ is the only Central Bank that forces exporters to cede a portion of their export proceeds to itself in the SADC region. Instead the RBZ should be a player in the forex market, buying forex to build its reserves and selling forex into the market to stabilize the Zimbabwe Dollar exchange rates.

By insisting on forex surrender requirements, the RBZ is sending a clear message that it does not have confidence in the domestic forex market. If the RBZ expects everyone else to buy forex on the market using Zim Dollars, why does it not exude confidence by demonstrating that everyone, including government, also buys forex openly in the market? Business or market confidence which is a precursor to the success of any economic policy, can never be built through hypocritical actions by the authorities.
The minister of finance announced in his budget speech that 34 tonnes of gold was smuggled to south Africa by producers trying to evade the RBZ surrender requirements for gold exports. Losing USD1.5 billion worth of forex revenue for a country which cannot raise USD300 million for critical electricity imports surely calls for bold and drastic policy response by the authorities to remedy the situation.

The SARB allows all exporters to receive all their forex proceeds into their CFC accounts for up to 180 days. However, any expenditure by the companies must be made of the Rand, which forces companies to liquidate their forex deposits in the forex market and create demand for the Rand.

III.    The RBZ must cease being a banker to government
To help reign the government's insatiable appetite for funding for fiscal expenditure, reforms must be instituted to immediately put a stop to the unprecedented and harmful practice of government's direct borrowing from the Reserve Bank via a Central Bank overdraft. The Governor of RBZ can not decline a loan requested by his boss. During the GNU era, CBZ was the banker to the government. It is not international best practice for government to borrow directly from the Central Bank, it is a recipe for disaster, as the central Bank becomes in essence, an extension of government.
The SARB is not a banker to the South African government, the Department of Treasury and South African Revenue Services (SARS) have bank accounts with commercial banks.

IV.    Fidelity Refinery must cease being a subsidiary of RBZ
Is there any good reason why a Central Bank should be the main player in the gold market besides the fact that it was an inherited structure from the pre-independence war government of Ian Smith? The South African gold market was the biggest in the world for centuries, but the South African Reserve Bank was never a player in the gold market, besides regulating the trading of gold in the financial markets and buying gold from the financial markets to build its sovereign forex reserves portfolio. Rand Refinery is owned by the biggest gold mining companies in South Africa, it refines gold for its clients and the gold is openly traded in the financial market.
The problem with a central bank buying gold buying directly from producers, is that nothing stops the RBZ from simply printing money to buy all the gold produced in the country. If this is the case, could this provide the answer to the uncontrollable growth of reserve money supply levels which have been recorded this year? The increase in gold produced in the country becomes an economic curse, as the RBZ just prints more money to buy the gold fuelling more inflation and macro-economic imbalances.

V.    Forex must be priced and allocated through an efficient market
According to the IMF country representative to Zimbabwe; Patrick Imam, "In Zimbabwe we price forex incorrectly. We export over US$5 billion worth of goods, but Malawi exports about US$400 million but there are no fuel shortages, access to pharmaceutical products challenges, and so on. The problem with Zimbabwe is not foreign exchange, it is that of pricing foreign exchange incorrectly. The foreign exchange is under-priced, for example subsidies to fuel and the result is that we never have enough foreign exchange as people will buy fuel and smuggle and sell it to other countries." Even countries recording very high economic growth rates such as Rwanda, Ethiopia and Kenya generate less forex than Zimbabwe, yet their economies are not hamstrung by forex shortage induced hyperinflation. If President Mnangagwa is serious about bringing about real economic transformation, these are the naked facts that he cannot afford to gloss over, they deserve urgent and bold decisions, doing the same thing over again and expecting different results is the definition of foolishness.

The RBZ should not be involved in the allocation and pricing of forex, it has totally failed in this regard. Rather the RBZ should regulate and supervise the forex market in the banking sector in line with international best practices. The RBZ can also control what can be paid out of our forex by running an efficient exchange control regime which limits the demand for forex by providing exchange control approvals for what can be paid for externally, but leaving the pricing of the forex to the markets.

Uncontrollable money supply growth is the root cause of macro-economic instability

The 86% growth in money supply from January to September 2019, at a time when real economic growth is down by -6.5%, is the root cause of the macro-economic implosion that has sunk the country into stagflation and brought us nearer to the conditions of 2007.

The monetisation of the Command Agriculture expenditure and probably the printing of money by the RBZ to buy gold from producers have fuelled uncontrollable money supply growth and hyperinflationary conditions that have brought immense suffering to the populace. The RBZ has responded to the massive money supply growth it has created by depriving the citizens of adequate ZW Dollar cash notes and coins needed for transaction purposes and, in the process, creating arbitrage opportunities for the parallel market trading of notes and coins, inducing more suffering to vulnerable citizens. Limiting notes and coins in circulation and maintain small denominations for notes, is no panacea for the massive money supply growth challenges. The solution lies in a truly independent Central bank mandate which provides a cushion to the economy for irresponsible government expenditure. There are many countries with debt to GDP ratios way higher than that of Zimbabwe, but that high government debt is not irresponsibly monetised into the economy because of the existence of independent central banks. The independent central banks ensure that high government borrowing does not become inflationary by managing interest rates and tightening money supply growth to ensure continued macro-economic stability irrespective of high government spending. This is what Zimbabwe desperately needs out of its central bank, an RBZ acting independently for the sole purpose of keeping stable domestic prices of goods and services and maintaining the value of the currency.
The only way President ED Mnangagwa can turn around the current deep level economic challenges the country is facing and build himself a legacy as the leader who brought sustainable economic stability in Zimbabwe, is by taking bold steps to reform the RBZ against all vested interests. All other noble efforts being undertaken to resuscitate the economy by the internationally respected finance minister; Mthuli Ncube, will be futile and of no force and effect under the current policy environment. The country is crying out loud for an independent central bank with a clear mandate to protect the value of the currency and maintain stable prices to create a conducive environment for real investments to flourish, sustainable economic growth and a fall in the record high unemployment levels. The GNU period clearly gives testimony to how our economy grew tremendously with no hindrance from the RBZ. Zimbabwe belongs to the global family of nations and we must align ourselves to best international practices that have proven to work in successful nations. The days of the RBZ experimenting with the livelihoods of the people of Zimbabwe through unorthodox economic policies never proven to work elsewhere, must become a thing of our painful past, from which we have learnt hard life lessons.

Having direct control of the Central Bank by the government may appear to be a key and indispensable power tool to the gullible politician, but the instability such a governance structure perennially brings to the national economy, will eventually be the gullible politician's undoing and waterloo!

Martin Majaji is a member of the Institute of Chartered Accountants in England &Wales (ICAEW) and read for an MSc in Finance from the University of London, he is a financial, treasury and economics practitioner based in Johannesburg.
Source - Martin
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