Bond Notes Controversy and the Chinamasa Reforms

In the Mid-term fiscal policy review of 2016, the Finance Minister Patrick Chinamasa proposed to cut 25 000 jobs by December 2017 and said it would save $155 million annually; freeze Civil Servants bonus for the next two years to save $180 million and also to close some embassies. Gross Domestic Product (GDP) of 2016 forecast at 1.2% from the initial projection of 2.7%. Revenue for 2016 is at $3, 755 billion down from $3, 85 billion of 2015. Budget deficit reached $623, 2 billion in the first half of 2016 against a full year projection of $150 million and the deficit is now seen to be at over $1 billion at current expenditure levels.

The government has however sabotaged these Chinamasa reform measures by overturning his proposals to cut salaries and suspend bonuses for civil servants. It's now the second time the government reversing the Finance Minister's policies, a move that further destroys investor confidence. One would wonder whether they will be no any consultations with those who purport to have the power to do policy reversals before these policies are announced to the public. These policy inconsistencies are embarrassing and they are a sign that that there is no hope for economic reform in Zimbabwe, not in the near future. The government is divided.

The Finance Minister would talk of cutting jobs and introducing taxes on civil servants allowances in order to save less than $400 million annually for development purposes when it's not too long to forget the $15 billion from diamonds that disappeared. This move would be seen as going against the most despised and failed economic policy, Zim-Asset, that is aimed at creating about 2.2 million jobs by 2018. However the contrary has happened as companies closed and are still closing down and the remaining ones had laid-off workers, creating 2.2 million vendors instead. I would question the minds of other intellectuals who try to defend Zim-Asset saying the vendors that mushroomed most parts of the Zimbabwean cities are part of the jobs that the government has created. A rational economic agent would not become a vendor by choice if that person is holding the qualifications that would make one get a good job in the formal sector. We have seen a lot of running battles between the police and these so called vendors.

The Minister is planning on adding 25 000 people into this pool of vendors by December 2017, a move that would further impoverish people. It seems the government is now obsessed with paying civil servants and it would blame these hard working employees for gobbling a whopping 96,8% of the collected revenue in wages. In order to reduce the budget deficit, the only way left in the Minister's mind is to cut their wages, which he did late last year in the name of pension and now he wants to play that same old trick again through levying taxes on civil servants allowances. The Minister is forgetting that elections are near and the bosses will not accept his policies that might exacerbate social unrest.  

Now that the government refused to cut salaries and to suspend bonuses like what the Finance Minister wanted, so what next? Where is the government going to get the money to foot the civil service wage bill and to pay bonuses? This is coming in the same period when the Reserve Bank of Zimbabwe Governor, Dr. John Mangudya is planning to introduce bond notes in October as a form of an export incentive. Government revenue collection is decreasing and budget deficit is now targeted at above $1 billion and in addition, there are food shortages in most parts of the country and it requires the government to intervene to provide food relief, not forgetting the coming 2018 elections that will need to be funded. In the face of all this pressure, will the Governor resist the appetite to print more bond notes? I wonder.

The monetary authorities might want to discredit peoples' fears and rejection of bond notes arguing that it is based on speculation but its speculation that is dangerous and that causes policy invariance or policy mutation. Economic agents are not passive policy takers but they are active participants who greatly affect government policy formulation. People do not want bond notes no matter how best the authorities might try to defend them and introducing them in the face of the nation's resistance would cause more social and economic unrest, apart from further impoverishing the already poor citizens. I have heard so many times those in offices claiming that Zimbabwe is a democratic nation where people are free to air out their views, let us test this claim on this bond notes issue because from my own observation, it's quite clear that the nation has rejected.

It was not very clear why the monetary authorities refused to adopt Rand as a trading currency. I understand that the United States dollar is overvalued and its difficult to sell the output, whose costs has been paid in US dollars, in another currency. The exports will not be competitive in the international market. Adopting Rand as a trading currency and then allow the US dollar to be just a reserve currency would do our economy good. We can still pay those export incentives in the form of Rand unlike going for the much criticized option. South Africa is our major trading partner and the reason why the monetary authorities are disinclined on adopting the Rand is clear-they can't print it!

The current ongoing lawsuits against the government on the bond notes move are disastrous towards the success of the policy. They are causing great harm to the little confidence that had been built in the market towards bond notes. I would advise the monetary authorities to drop it, and opt for something else. Although the policy might seem to work from the perspective of the policy makers, but the fact that the nation has rejected and it's the nation that would be using the bond notes, then their introduction in the face of public resistance is disastrous.

The Finance Minister was silent on the bond notes issue in his Mid-term fiscal policy review and rather he only pointed out that Zimbabwe will continue using the multi-currency system but I am quite convinced that in the face of dwindling revenue levels; the pressure to foot the civil service wage bill and bonus and pressure to reduce the external debt of over $10 billion that has its 80% in arrears, the monetary authorities are not going to resist the need to print more bond notes. This is the move that is feared by many and is far enough to take Zimbabwe to a worst economic crisis than the one experienced in 2008.

The bond note era and the period after is uncertain and this is making it difficult for economic agents to plan and budget, investors would certainly adopt a wait and see attitude outside the country. The nation has long waited for powerful economic reforms that would revive the country to the same jewel of Africa it once was in 1980. One would not need an Economist to tell that the current problems that the country is facing are deep seated in the structure of the economy and that Bond notes introduction is far from being the best policy to solve these problems.

 I know those who claim to be intellectuals would criticize these views in the name of 'Bookish Economics' but I then question the type of economics they are practicing. I still remember well in 2006 when the then powerful Finance Minister Herbert Murerwa was blasted when he had called for the end of quasi-fiscal activities which he argued would fuel hyperinflation and kill the local currency. The government claimed that it was bookish economics at the Ministry of Finance and that Zimbabwe is under sanctions and those are the kind of expenditures the country needed but we can all testify what later happened in 2008. Then what is better, bookish economics or economics that is devoid of microeconomic foundations and that is aimed at pursuance of political agendas at the expense of economic stability.

Blessing Machiva is an Economist and he writes in his own personal capacity. Criticisms and comments can be forwarded to machiva.blessing@gmail.com or WhatsApp number +263 773 836 435