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What IMF report really says about Zimbabwe's economy

06 Mar 2020 at 12:34hrs | Views
Unsurprisingly, the Reserve Bank of Zimbabwe (RBZ)'s 2020 monetary policy statement is more of the same — a tired litany of promises waiting to be broken and targets queuing up to be missed. Governor John Mangudya, who just a year ago promised to "preserve value" has since delivered over 500% inflation and 94% devaluation.

Such active value destruction continues, compounded by the issue of Treasury Bills to institutional investors. Just how issuing TBs at 14% or 15% qualifies as preserving value is beyond comprehension. Perhaps Mangudya will explain?

He now insists that inflation is on a "sustained downward trajectory".  The markets do not believe him, nor should they. Leading indicators, such as the 77% premium in the parallel exchange rate market - the highest for eight months - and the 80% increase this year in the Old Mutual Implied Rate to 48 to the dollar are clear signals of where inflation is headed. More value destruction beckons.

It would help if the RBZ's targets were internally consistent, but unsurprisingly they are not. The central bank will restrict growth in the monetary base to 15% which would be a $1,3 billion increase. Simultaneously, it will increase the note and coin issue to 10% of the money supply which as at December 31, meant a $2,5 billion rise or near-double the promised addition to the monetary base. The two targets are irreconcilable, as time will tell.

Other forecasts are driven by political correctness. Real growth will be 3%, exports will rise and the economy de-dollarise, though this will take five years. The people and the markets must wait patiently for the RBZ to deliver, no doubt with the same results as in 2019.

Outside State media, party loyalists and the Monetary Policy Committee (MPC), few will believe this. In its report, this week the Commercial Farmers Union notes that rainfall is still "way below" average levels in most districts, while irrigated crops have had major problems due to erratic power supplies. Tobacco plantings are down — 12% for the irrigated crop — and with prices set to take a knock from reduced global demand, the value of production is predicted to fall 15%.

This does not sound like 5% recovery in agriculture as officially predicted. Much the same can be said of mining, which stands to take a big hit from impact of the coronavirus (covid19) on global demand and prices.

Manufacturing will also be down very sharply according to the CZI's industrial outlook report with capacity utilisation slumping to an 11-year low.

In its Article IV report, the International Monetary Fund (IMF) also believes that there will be positive gross domestic product (GDP )growth in 2020, albeit only 0,8%, accompanied by a slowdown in inflation to average 221,1% from 255% in 2019. That the IMF propagates such nonsensical forecasts to tenths of a percentage point raises all sorts of doubt about the reliability of the accompanying narrative in its report. If it wants its analyses to influence governments and businesses, then it should avoid insulting users' intelligence. Computer modelling and excel spreadsheeting have their place, but they are no substitute for common sense.

The IMF's monetary forecasts don't make a lot of sense either. It suggests that although inflation will average 221%, money supply will increase by only 24,4% — more exact precision. This sounds highly improbable, not just because a much closer correlation would be the norm — in 2019 the two were in touching distance of each other at around 250% — but also because the evidence suggests that at the very least money supply will double.

At today's parallel exchange rate (32,5 to the US dollar) foreign currency accounts, add almost $11 billion or 30% to money supply. On the IMF's figures, the budget deficit will come in at some $19,5 billion — not the $5 billion projected in last November's budget — which will mean much more government borrowing, swollen also by  the now-usual off-budget fiscal activities and inflation and devaluation-driven increases in private sector borrowing.

Add in the promised printing of notes and the money supply – $35 billion at the end of 2019 – is set to double, fuelling inflation and currency depreciation in the process.

Ironically, just as the RBZ is punting tight monetary controls, G7 central banks are promising an easy money strategy to counter the threatened downturn caused by Covid-19. So while in the rest of the world central banks try to head off recession by easing policy – the US Federal Reserve has done so already — Zimbabwe, already in deep recession, is committed to strict monetary-targeting, albeit accompanied by massively negative real interest rates, that are inimical to monetary control.  

Profoundly depressing too, is this week's announcement that the RBZ's latest mission involves monitoring the use of so-called free funds by filling stations to import and sell fuel in US dollars. That is not a central bank function. It should stick to its knitting.

While monitoring, the RBZ might notice that a litre of petrol purchased in US dollars currently costs 140% more than that bought in RTGS currency converted at the market rate. This presumably is what the RBZ and MPC mean by "price discovery"

Insufficient attention is being paid to the impending wage explosion.

Government set the ball rolling with its 150% pay hike, also promising a review in April and periodic cost-of-living adjustments. Now the mining industry has followed with a 187% pay award for the lowest paid which at a minimum of ZWL$3 200 a month still leaves them well below the poverty line for a family of five of some ZWL$4 200 a month and rising rapidly. Other industries will have to catch up thereby fuelling further inflation.

In fact, monetary restraint as promised by the RBZ is neither socially desirable nor politically feasible when real incomes, consumer spending and GDP are falling, real spending by government is down, and unemployment and poverty are increasing.  

In its report, the IMF acknowledges this reality with its warning about the deteriorating humanitarian situation. This is not what the authorities want to hear, preferring to take refuge in their own forecast fantasies, but for how much longer?

Source - newsday
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