When I first heard that the first step in problem solving is identifying the problem, I thought that was a bit condescending. Pre-teen me couldn’t understand how one could not know the problem they were trying to fix.
By the end of my teens I was well too aware of just how difficult it can be to identify the problem. When I went through a rebellious phase my mother forbade me from hanging out with certain friends, I felt sorry for her. I was the problem, not my friends.
As a collective, we have felt the same about our beloved Reserve Bank of Zimbabwe (RBZ). We have watched them misdiagnose the problem for years and years.
As our Zimdollar struggled, we saw the RBZ and the government wage war against ‘economic saboteurs.’ They were adamant that dealers/manipulators were the main reason for the Zimdollar tanking.
We all knew they were expending their energy fighting the wrong enemy. It was frustrating to watch but I’m happy to report that the RBZ’s eyes have been opened.
Governor Mangudya’s open eyes
It was late last year when we noticed the scales start to fall from the RBZ governor’s eyes. He shared the observations he had made in an interview.
People have got this heart, that obsession, that requirement to always hold foreign currency. They think it’s a more stable currency, which it is also.
Dr John Mangudya, RBZ Governor
Our governor thought we would be surprised to find out that Zimbabweans’ demand for foreign currency had nothing to do with imports. Which showed he and his team had been looking at the problem all wrong.
You would be surprised to find out that the demand factor for foreign currency is a store of value demand as opposed to the import demand for foreign currency.
Dr John Mangudya, RBZ Governor
At the time we remarked that not a single Zimbabwean who doesn’t work at the RBZ would find that surprising.
Now that we are on the same page with our RBZ overlords, will they start coming up with solutions that are more appropriate?
Uptick in inflation
The Monetary Policy Committee met on the 29th of April 2022 and they “noted with concern the recent uptick in month-on-month inflation, from 7.7% in March to 15.5% in April 2022, and the increase in annual inflation from 72.7% in March to 96.4% in April 2022.”
We have all felt this uptick in inflation. Recently we talked about how respected economist, Steve Hanke, calculated Zimbabwe’s year on year inflation in April at 207%. That’s quite higher than the RBZ’s figure of 96.4% and yet feels more accurate to my hurting heart.
Whichever figure you trust, the fact remains, inflation is getting out of hand. Why?
The committee says it’s “a combination of global shocks and the pass-through effects of the recent exchange rate depreciation on the parallel market.”
So, the Russia-Ukraine war and the forex black market. The committee believes the war takes a significant portion of the blame.
This is in line with other governments’ excuses. The United States is experiencing it’s highest inflation in 40 years and their government blames the same Russia-Ukraine war. Never mind that they have been printing the USD like their lives depended on it since 2008.
The war no doubt has some impact on our inflation. We have little influence on that and so most of our energy should go to the impact of the depreciating Zimdollar on inflation.
Sound economic fundamentals
The RBZ notes that on paper, the Zimdollar should not be depreciating like it is. Most economic fundamentals are sound and yet here we are.
Money supply
Our grief with the RBZ usually came from them printing too much money. They seem to have learnt their lesson and we have had multiple ‘excess money mop up’ exercises. By now, everyone knows what the RBZ means by ‘tight monetary policy.’
Reserve money has been hovering around the ZWL$28 billion mark for the past 6 months.
Annual growth in broad money was 151% in March 2022, compared to 384% in March 2021. A slowing growth rate in broad money supply is a good sign and yet inflation is surging even faster.
Favourable current account balance
Ask anyone on the street and they will tell you that Zimbabwe’s problem is that we are not producing enough. We need to export more than we import to lift this economy.
Well, in the first quarter of 2022 we generated US$2.4 billion in forex receipts, a 15% increase from last year, against payments of US$1.8 billion. That makes for a net inflow of US$600 million which helped increase the balances in our foreign currency accounts and national reserves to US$1.9 billion.
Any economics student will tell you that the above is good and yet it was in that same quarter that inflation roared. The economics student will remind you of the caveat, ‘all things being equal.’
All things are not equal in Zimbabwe and so what the economics textbook tells us to expect from a favourable current balance does not materialise.
Other economic fundamentals
The government under Mthuli Ncube has been responsible. They have been spending within their means for the most part. That’s another positive.
Then there is the issue of public works undertaken by the government. The RBZ sees these as a positive but that’s assuming all things are equal.
We discussed how analysts think these infrastructure projects hurt us in 2021. When the government announced they would be doubling their 2021 spend in 2022 it spelt trouble.
The main problem with the government spending billions on infrastructure is that all beneficiaries of that money look to convert it to USD at the earliest convenience. Therefore they flood the black market with Zimdollars, tanking our local currency in the process.
The problem of trust
Most economic fundamentals were sound in the first quarter and yet inflation increased. By process of elimination, the RBZ was forced to admit that the main problem in Zimbabwe is that of lack of trust in the Zimdollar.
The existence of strong economic fundamentals suggests that the recent exchange rate shocks are a manifestation of negative sentiments or perceptions attributable to people’s past experiences with hyperinflation and inevitable losses incurred during currency reforms. The Committee further noted that the erosion of people’s savings due to inflation compelled them to try and avoid similar losses by holding the US dollar as a store of value.
Dr John Mangudya, RBZ Governor
It’s sad that it took this long for these educated leaders of ours to get what the average Zimbabwean has been saying since the introduction of the bond notes.
The solution
With the problem accurately identified, the government and the RBZ believe they have the solution. It all boils down to enhancing confidence in the economy, dealing with market indiscipline and increasing demand for the Zimdollar.
i. Maintaining the 80% interest rate. The high rate is supposed to discourage speculative borrowing but when even the official inflation rate at 96.4% is above that, what’s the point of the 80% rate?
ii. Maintaining the minimum deposit rate for ZW$ savings at 12.5% per annum. This doesn’t make sense any more, inflation is at least 96.4% so who is going to be enticed to save when promised 12.5% interest.
iii. Maintaining a low reserve money growth rate of 5%. Nothing wrong with that.
iv. The $1000 limit on the willing-buyer-willing-seller arrangement for banks and bureaux de change to remain. Why does the limit exist? See, this is why we can’t call the official foreign exchange rate figures accurate. The RBZ won’t allow the market to work unfettered.
Dejavu
You may have noticed that none of the solutions are new despite the RBZ conceding that the problem is different. The following quote sounds ridiculous,
In view of the foregoing developments, the Committee resolved to maintain the status quo…
Dr John Mangudya, RBZ Governor
Here the monetary policy committe is saying that they noticed that the actual problem in Zimbabwe is the lack of trust in the Zimdollar. Which is different from what they thought the main problem was.
However, they are sticking with the solutions they came up with back when they thought the problem was something else.
You would have thought new problems require new solutions but you would have been wrong. The solutions that were in place as inflation soared should be good enough to reverse it.
I don’t get it but it’s what the RBZ is going with. Maybe they reasoned that since some of these measures were only introduced on the 1st of April, they deserved some more time in the limelight.
While I admit that 1 month is not enough for any measure to transform the economy, I still feel like maintaining the status quo after a disastrous month is not wise. So much for the RBZ’s eyes being open.
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