Phil Collins is a world-famous drummer and one-time frontman of British rock group Genesis who is however better known as a solo artiste for his socially conscious and award-winning song Just another Day in Paradise.
His other notable song is Do You Remember? In his own words it “looks back at what happens at the end of a relationship”. There is a part where Collins sings, “There are things we won’t recall and . . . feelings we will never find.”
That got me thinking. What really happened at the end of our relationship with hyperinflation?
Was dollarisation the perfect opportunity to make a clean break with the past?
What things might we not recall now but which defined the dynamics of that ended relationship, and could return to haunt us again? When we contemplate the current liquidity crisis for instance, do we remember that the very same market was once characterised by excess liquidity?
And do we remember the numerous ill-fated measures the Reserve Bank of Zimbabwe (RBZ) deployed in an effort to sterilise excess liquidity?
Back then, the central bank wallowed in a deep pool of quasi-fiscal activities while — ironically — seeking price stability and simultaneously waging a guerrilla war against “speculators”.
RBZ governor Gideon Gono never missed an opportunity to lash out at the speculators for stoking the raging fire of inflation, and the latter group contended that they were merely trying to protect their wealth from the central bank’s unpredictable and ultimately inflationary policies.
Steeped in the “shock and awe” tradition, the RBZ governor sought to remain as unpredictable as possible, while the speculators second-guessed his every move.
This week we review the toolkit of “corrective” and “pre-emptive” measures which he deployed as he sought to outwit “public enemy number one” and its purveyors.
The Financial Sector Stabilisation Bond (FSSB) was a five-year instrument introduced in early October 2006, ostensibly to strengthen the financial sector’s medium to long term asset position but in reality to manage the impact of the CPI-linked bond by opening up liquidity deficits that would see an increase in interest rates and cut off supply of liquidity to speculators.
The market saw the FSSB as a disguised attempt to increase statutory reserves which had only recently been reduced. The holding thresholds were based on financial institutions’ balance sheet size as at September 30 2006 and ranged from 15% for commercial banks to 7,5% for asset management companies.
The RBZ caved in to market pressure and on November 3 2006 suspended a recently announced five percentage point increase on the FSSB, which would have matured in October this year had it stayed.
The Economic Stabilisation Bond (ESB) was introduced in late October to counter the high levels of liquidity emanating from Treasury Bill maturities and CPI-linked Treasury Bill coupon payments.
The ESB had a tenure of seven years and was compulsory for all financial institutions. Just like the FSSB, take-up was based on balance sheet size. The unpopular bond was however dropped in early November 2006.
Statutory Reserve Ratios were an integral component of the RBZ governor’s toolkit. To illustrate this, the ratios were changed four times during a six month spell from February to July in 2006.
Typically, the impact of statutory reserves was that after a sustained surplus for much of the week, the market would swing into a deficit on Mondays owing to statutory reserves outflows.
Interest rate hikes: Interest rates were the lead instrument through which the RBZ sought to transmit monetary policy signals to the real economy.
History records that over an 18-month period from January 2005 the Reserve Bank embarked on a round of rate hikes that saw the accommodation rate — the key policy rate — increase from 90% to 900%.
However by July 31 2006, the apex bank was showing signs of fatigue from shifting deck chairs on a sinking Titanic and appeared to be changing course by loosening its monetary policy. The rest, as they say, is history.
The Non-Negotiable Certificates of Deposit (NNCDs) were designed to mop up excess liquidity by coercing banks to invest in money market instruments such as long-dated Treasury Bills.
They were deterrent in that they discouraged banks from hoarding liquidity and encouraged them to lend to each other on the interbank market.
In Do You Remember? Phil Collins sings, “You know people are funny sometimes, because they just can’t wait to get hurt again.”
Given all of the foregoing ill-fated — and sometimes painful — manoeuvres, I am amazed by those who sometimes call for the immediate return of the Zimbabwe dollar; I wonder whether they ever stop to consider the kind of baggage that could show up with an ill-timed return of the local currency unit.
Be careful what you wish for, you may get it, so goes the old saying!
Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd writing in his personal capacity.