The biggest issue I have with all the economic theories, principles and rules I know is that they start with the qualifier, “All things being equal.” All things are never equal more so in this beloved country we call Zimbabwe.
I felt sorry for the governor of the Reserve Bank of Zimbabwe as I was going through his recently issued monetary policy statement. He is battling with a serious case of zero things being equal and therefore even the most logical things he proposes become illogical just by being proposed in and for Zimbabwe at this time.
The sense I get from the governor’s statement is that he is still viewing the fire that is the Zimbabwe economy as a ferocious but ordinary wild veld fire. Such a fire can be put out by dumping loads of water on it no problem.
An electrical fire is another story however, If you spray water on it, it may cause a short circuit (water conducts electricity) making the fire worse and may even electrocute people around especially the person doing the spraying. The Zimbabwean economy is exactly like that, it will not respond to the regular tools of the trade, not in the way desired, it will get worse instead.
The water Mangudya is spraying
His logic of the evil of dollarisation
Dr Mangudya in his statement correctly explains how dollarisation was damaging to the economy right from the beginning in 2009. Please forgive the large excerpt below but it’s super important:
The past experience of the country is quite instructive that promotion of use of local currency is beneficial. In 2009 the country legislated a fixed exchange rate under the auspices of dollarisation. Electronic or virtual currency was commingling with physical foreign currency and the two were at par. With hindsight, what was supposed to have been done then was to allow the local currency to be part of the basket of currencies as evidence on the ground shows that the country did not have sufficient foreign exchange liquidity to meet its foreign currency commitments even under dollarisation.Dr John Mangudya Monetary Policy Statement Feb 2022
Legislation of a fixed exchange rate, as was the case in 2009 when the US$ was introduced as the currency of transaction, is not ideal for any economy as it renders the economy uncompetitive and a supermarket economy and gives the wrong impression that foreign currency is a domestic currency which is earned without exporting.
Foreign currency needs to be earned from foreign sources such as exports and remittances and competitiveness of local production becomes very essential to promote exports, and stability of the local currency is key to promote investment and for value preservation.
The governor is quite right in this logic and he uses it to explain why we should continue ‘using’ the Zim dollar. What he forgets though or neglects to consider is that we are ‘hardly using’ the Zim dollar. Our landlords and landladies are demanding US dollars and so is the smiling young lady at the vegetable musika.
We are being forced to source US dollars if we want to eat vegetables and go to sleep with a roof over our heads. How do we source the forex? We demand USD for whatever little wares we sell to our friends and families as a side hustle or we beg our not so favourite aunties and uncles in the diaspora to send us a buck or two.
The reason all this is happening is because our landlord and the smiling girl and indeed all of us just cannot trust the local currency. The government itself cannot trust the currency Mangudya issues, it demands USD120.00 from you and I to get the new e-passport. Zvakawoma veduwe. That lack of trust is what dooms the Zim dollar no mater what the good governor does even when it is backed by good economic logic as he expounded in the excerpt above.
What the governor forgets is that in 2009 the government did not demonetise the local currency, it merely officialised the demonetisation of the local currency. Citizens demonetised the local currency in 2008, they just started rejecting it. I almost lost a limb back then when I had the nerve to attempt to pay ZW$10 trillion for the lift I had just been given at the back of an open truck. Zvakawoma kani.
Those 2008 forces are still at play here and they make Mangudya’s logic illogical.
Fuel in local currency
This is just a bad idea. Here is Dr John:
The Bank is therefore putting in place the following additional measures to support and promote the use of the local currency in the country:
a) Increasing foreign exchange availability to fuel service stations designated by the Zimbabwe Energy Regulatory Authority (ZERA) to sell fuel in local currency.
This move just creates arbitrage opportunities. Folks who don’t even own cars will queue up for the ZWL fuel and then turn around and sell it for USD. Easiest money ever made. Vanhu ava havadzidze vakaita sei: in the same statement the RBZ has all but scrapped off the USD50 at auction rate per week facility because of arbitrage.
After dishing out USD23 million under this facility they discovered some folks had made it a business to queue for the 50 and then turn around and sell it on the parallel market. For some reason the economists at the central bank think it will be different with fuel. Kungoda kutiwona tiri muma queue chete.
Revised limits on transactions
This is a good thing but not for the reasons the governor gives. Here’s what he says:
d) Increasing the limit on mobile banking transactions as follows: –
a. Person to business from ZW$20 000 to ZW$25 000 per transaction with a maximum limit of ZW$100 000 per week; and
b. Person to person from ZW$5 000 to ZW$10 000 per transaction with a limit of ZW$70 000 per week
f) Increasing the cash withdrawal limit for the banking public from ZW$2000
to ZW$5000 per week.
This is a good thing because limits on transactions are annoying. Any kind of relaxation is welcome and convenient. However, Mangudya is relaxing the limits in order to encourage the use of local currency and thus to kill the forex black market. Water to an electric fire, this will not only not work but it will also make the black market go crazy worse.
What the relaxed limits will do is that they will add more local currency accessibility on the streets. In general terms the Zim dollar that the public gets access to is only useful for one thing, it is only used to buy one thing: the US dollar! So if people get more of the Zim dollar then they are going to compete more fiercely for the USD on the parallel market and the rate will go bonkus. Electrocution.
The electric to the fire
The problem that makes zero things equal in this economy is the zero trust people have in the government and the money it issues. This is for a good reason too, people have been robbed and have had their savings wiped several times over the years as policy shifts happened overnight. Until the problem of trust is solved then water will not work on this fire. Dr Mangudya may need to look outside the regular toolbox for this one, it’s an electric fire.