SOON after the June 1979 electoral victory in the United Kingdom, Lady Margaret Thatcher, the new Prime Minister, eliminated restrictions on the ability to move money in and out of the United Kingdom. Some of her supporters regard it as one of her best and most revolutionary acts. The Telegraph noted that “in the economic dark ages that were the 1970s, UK citizens could forget about buying property abroad, purchasing foreign equities, or financing a holiday. The economic impact was devastating: Companies were reluctant to invest in the UK, as it was tough even for them to move money back to their home countries”. Thatcher, the Telegraph applauded, abolished all these nonsensical rules and liberalised the UK’s capital account. Tapiwa Nyandoro
Should Zimbabwe’s Cabinet meet to discuss the economy, the “nonsensical rules” may be on the agenda. The Reserve Bank of Zimbabwe (RBZ) and the country’s Treasury see them as only palliative treatment of symptoms, as opposed to a cure for the disease. The question needs to be asked whether by masking the disease, the RBZ rule book, the easy way out in the short term, is taking the country back into the dark ages.
It must, however, not be forgotten that the UK is a populous developed country, as it was in the 1970s. Zimbabwe, on the other hand, is a small, young developing country, without a currency of its own. What is good for the goose may not necessarily be good for the gander.
While the adoption of a hard multi-currency regime in its local market had taken off rather impressive after hyper-inflation had delivered a fatal blow to the local currency in 2008, problems have arisen of late, as the US dollar, which the government had controversially favoured as the anchor currency, appreciated significantly against most currencies over the last two years. The result has been increased imports and decreased exports for Zimbabwe.
It has also been a bonanza for the well heeled in Zimbabwe. Opportunities have arisen for investing in equities, housing stock and financial markets in neighbouring countries, particularly South Africa. Some of these assets may have been financed by taking mortgages on Zimbabwean homes or industries, and transferring the proceeds to neighbouring countries, leaving rather huge holes in the nation’s cash supplies. The situation could have been manageable had government’s fiscal process been prudent.
Instead, the cash shortage has been exacerbated by a global commodity prices’ slump and the El Nino related drought. The latter necessitated food imports. The sanctions tag, reckless talk of some Cabinet ministers, suicidal national policies that repel FDI and the incessant chaos in the ruling party itself, have added to uncertainty and country risk fuelling hard currency externalisation. The result is a panicked central bank.
RBZ and government are bringing back the “nonsensical rule” book. While it may have worked somewhat in the 1970s in the UK, and during the life of the Ian Smith regime, it fell apart in post colonial Zimbabwe. The unsustainability of the “nonsensical rules”, which was evident during the last years of the Smith and apartheid regimes, and corruption, which erupted after a few years of independence, were two of the reasons.
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After independence those entrusted with rationing scarce foreign currency to industry and commerce soon became very rich. Those who qualified to get foreign currency from the banks, via the Ministry of Industry’s Direct Local Market Allocation system, as before independence, could not fail. They were in a race without competition, until briefcase businessmen, who, by bribing the system, soon found themselves at the head of the queue for hard currency, from whence they sold it to genuine industrialists pushed to the back end of the queue.
With foreign currency in short supply, pricing was always a case of total absorption costing plus a generous mark up. It is and was a recipe for shortages, high prices, super profits, and inflation. At the bottom of the food chain the people suffered.
Besides corruption, the second problem after independence is and was fiscal profligacy. Partly, it is forgivable given the toll of the war and the crisis of expectation around the provision of social services. There was hardly any money left for capital projects that sustain economic growth. Without economic growth, especially increases in exports, the foundation of a currency crisis was laid. This problem has worsened with time. It needs urgent addressing. China is not the solution.
In addition to the “nonsensical rule book”, or as part of it, the RBZ wants to introduce bond notes, some form of a local “currency”, pegged to the US dollar to mitigate the cash shortage. It is a noble objective, though the pegging could be misguided. Finance and Development (September 2013) notes that small countries are more likely, than larger ones, to peg their exchange rates to another currency. While the currency peg manages exchange rate volatility, it requires the small country to hold substantially more reserves than other countries without the peg.
In Zimbabwe’s case bond coins and notes’ reserves are borrowings. It may be a sign of future trouble. The peg, or the lack of a floating local currency, also exclude monetary policy as a tool to manage economic growth, further dissuading potential investors
Speaking in Harare recently, the US ambassador made similar observations in relation to Zimbabwe’s intended bond notes. He pointed out the currency restrictions dissuade investors.
Two cash crises within a decade should be lesson enough. As it deliberates on the economy, the choice Cabinet has is whether to hammer yet another nail into the economy’s coffin for political expediency, or to face the truth and implement the long over due structural and fiscal reforms.
l Tapiwa Nyandoro can be contacted on [email protected] or [email protected]
