Stop using complex monetary policies to solve common sense challenges

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Brian Sedze

By Brian Sedze
DEAR President Emmerson Mnangagwa
Your Excellency, the recent monetary announcement you made on national broadcaster ZBC is an awkward attempt to use complex monetary and fiscal policies for challenges that should ideally be solved using common sense.

The raft of measures are said to be a bid to promote use of local currency, nip inflation, stabilise exchange rate and deliver a remarkable standard of living to people. In my considered view, quite a deceptive detour from the challenges we face and really a misunderstanding of basic economics.

You announced the measures yourself by-passing Finance minister Mthuli Ncube and the central bank governor John Mangudya. If the economy refuses to listen to the President, then truly the rotten egg will be right on your face. It is not a great idea and maybe your advisors are trying to embarrass the Office and person of the President. The First Republic President often reversed his ministers’ policies as the last man standing, but this time you have made yourself the failure which should have only be associated with your “technocrats”.

Your Excellency, turning yourself into an economic technocrat is also a sure sign that you have lost confidence in your Finance minister and central bank governor because we expect the two to be employed to think. If they cannot take bold decisions and or announce them, they surely, in my view, have no purpose in an economy severely disabled like ours.

We probably could become the first country to ban banks from lending money to their clients in modern economic history. It should be common sense that these policies will have a severe contagion effect on banks profitability. Trying to solve a currency challenge by creating dysfunctional banks is not only extreme, but shocking failure to understand how these things are inter-related. I can’t believe Mangundya was part of this as he ran a bank holding company for many years and will know this basic fact. In my view, it was better to have asked banks to report on actual use of the money in their possession.

Your Excellency, you should know that this nyika inovakwa nevene vayo mantra is enough common-sense explanation of the run-away exchange rate and inflation. The construction of dams, roads, airports, power plants and hospitals though a great idea, but it’s using a wrong financing model. Long-term projects are being financed by broadening the money supply. It’s common sense that this money supply causes inflation and the chasing away of real money from contractors causes major demand for foreign currency and a decline in exchange rate. Long-term projects must ideally be financed by long-term finance.

Your Excellency, you recently claimed that the currency decline is caused by the sabotage by industry players in cahoots with foreign countries to cause regime change. I don’t believe it. Common sense is that a rigged foreign currency auction system creates arbitrage opportunities and millionaires are being created.

It is easier to float the exchange rate than  rigging it.

Your Excellency, it must be known it’s not more laws that ensure stability and prosperity but consistency. Your advisors must inform you that having more than 200 statutory instruments related to fiscal and monetary policies in just one year causes speculation and outward-looking investment by locals. It also doesn’t really show we know what we are doing when we have such a plethora of corrections of policy as exhibited by statutory instruments. We can’t be running the country using statutory instruments.

You also decreed more tax for transferring foreign currency, with 4% IMMT introduced. It means margins for business have to add that percentage or more. This tax will cause price increases. It also encourages pillow banking and by extension making foreign currency to go even more underground. The tax simply discourages banking. This shortage will cause massive loss of Zimbabwe dollar value.

Your Excellency, our currency challenges will not be solved by increasing transaction costs but by exporting, production and giving people the confidence of banking any currency they so desire.

Your Excellency, the common sense will be to exorcise the former Reserve Bank of Zimbabwe governor Gideon Gono ghost of raiding banks to increase confidence. People with money haven’t forgotten the pain.

You said the currency and inflation challenge is exacerbated by perception and speculation. It makes a lot of sense. However, you didn’t address how the announced measures would increase confidence. Confidence only increases with better governance systems at the central bank. It’s important for people to note that Gono killed even the smallest vein in trusting banks. The central bank, therefore, requires a person with a very different background and DNA in economics.

Your Excellency, I believe we need local currency as it allows the central bank to use a number of instruments to spur domestic demand and exports. People may have no issue with currency but the people responsible to deliver it to us. Unlike Afghanistan which scored on this, our present regulators concentrate on small fish and leave the sharks. There is no finality, consistency, and credible enforcement. Our governance of money is murky and promotes only crony capitalists. It’s not a good environment for a local currency.

Capital gains tax of 40% of stock investors was made to suck appetite for speculative Zimbabwe Stock Exchange (ZSE) activities. However, with inflation at about 100% per month, it is about 900% in the 270 days. So, it is still wiser to speculate more on the ZSE as the punitive tax is far outweighed by inflation.

Your Excellency, even if the punitive capital gains tax was to work, there is no viable alternative for the people to invest their money to preserve value. It may mean moving to the parallel foreign currency markets, further increasing its demand. Such a purchase of currency is followed by pillow banking, causing more currency shortages.

It would have been wise to float gold-related tradable instruments to capture ZSE speculators. Gold is an alternative to the US dollar in most economies.

Your Excellency, I don’t hold my breath for the success of this presidential decree as it avoided common sense and rudimentary economic principles.