Ncube’s measures: All froth and no beer

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Prof Mthuli Ncube . Chief Economist and Vice President of African Development Bank @ Michaelangelo Hotel Jhb . 10 July 2014 . Pics Russell Roberts

BY TATIRA ZWINOIRA
ON Monday the previous week, Finance and Economic Development minister Mthuli Ncube announced several new measures to help sustain the local currency following months of buttering.

His measures followed the continued weakening of the local currency, which declined to $700 to the US dollar on the parallel forex market.

Officially, the Zimbabwe dollar is trading at $352,06 and $365,23 on the auction and interbank forex markets, respectively, against the greenback.

The continued mismatch between the parallel and official forex rates has caused the annual inflation to run riot reaching 191,6% this month, up by nearly 60% points from March’s 131,7% comparative.

Treasury and central bank officials were struggling to find a solution as basic commodity prices rose almost daily, thereby eroding consumer buying power.

Treasury officially announced that it will codify the use of the United States dollar into law, which will allow businesses to display greenback pricing in their shops, something that was not happening.

“When one has nothing to say, one must shut up. Today’s presser was a tragic expression of the humongous levels of deceit, dishonesty, incompetence and hypocrisy of this regime. It is not news that the multi-currency system will continue,” former Finance minister and current Harare East Member of Parliament, Tendai Biti said on Twitter following last Monday’s announcement of the new measures.

“Fact is the economy has self-dollarised a long time ago. The regime owes Zimbabweans an apology for 2019 fiction contained in SI33 of 2019 and the botched de-dollarisation process. The regime must genuinely compensate those who lost value in 2019, particularly pensioners.”

He added: “The announcement was an acknowledgment of failure and will not address hyperinflation, food shortages and poverty levels affecting our people.

“It will not address the doctors and nurses strike nor low public (sector) wages eroded by inflation. It does not address skewered fundamentals and |the disequilibrium in the economy.”

By codifying the US dollar into law, the government is essentially officialising the already dollarisation process.

Another measure announced was government’s official adoption of the interbank forex rate as the exchange rate through the promulgation of a new law.

Since the inception of the forex auction, the rate that has been derived from there has acted as the official exchange rate for the Zimbabwe dollar. However, last month saw the central bank introducing a second official exchange rate calling it the “interbank rate” based on a willing-buyer and seller basis, amongst banks.

The difference between the auction and interbank forex markets is that the former is controlled by the central bank, while the latter is more flexible with values being offered at any time.

Biti, however, argues that even this interbank rate will not work.

“The willing-buyer willing-seller (WBWS) principle will not work as long as the auction system exists. The auction system is a source of arbitrage and must be abolished forthwith, further RBZ interference in the WBWS makes it dysfunctional. It is not a competent source of price discovery,” he said.

“The WBWS exchange, like the auction rate, represents yet another rigged rate, hence the huge difference between the same & the rate in 4th Street. The RBZ should have no role in determining the exchange rate. Truth is the central bank long outlived its usefulness and should be abolished.”

Zimbabwe Coalition on Debt and Development (Zimcodd), in its own analysis on Ncube’s new measures, concurred.

“The willing-buyer, willing-seller principle is likely to be ineffective because of the lack of public confidence in the banking sector. With the current huge disparity between the interbank and parallel market rate, it is most likely that those privileged with access to USD would risk accessing Zimdollars at the parallel market with spiking rates than going for lower rates at the bank,” Zimcodd said.

“This has the potential to increase inflation, a situation that is prejudicial to the majority who are earning in Zimdollars and below the poverty datum line.”

Noting the erosion on incomes, the government also increased civil servant salaries by 100% with effect from July 1.

Apart from these salaries, civil servants will continue to receive a COVID-19 and cushioning allowance of US$75 and US$100 official rates.

But, even when added all together, these amounts are still significantly lower than the US$550 civil servants used to receive during the Government of National Unity from 2009 to 2013.

To compensate, Treasury will offer civil servants in the executive a housing loan guarantee scheme, civil service housing loan scheme and access to the duty-free importation of a single motor vehicle for personal use.

Health workers will get on-call allowances, which apply to doctors and laboratory scientists on night duty as well as standby/callout allowances, which apply to nurses, nurse aides and general hands in theatre.

Health workers will also receive nurse manager allowances and COVID-19 and infectious disease risk allowances.

In addition, health workers will receive institutional housing starting with those working in Harare and Bulawayo, housing loan guarantees, efficient transport facilities, addressing deficiencies in the cafeteria system and uniforms for health personnel.

Teachers will get payment for performance awards, school fees for up to three biological children per teaching family taken care of, transport facilities and provision of 34 000 housing units as institutional accommodation.

And with elections next year, civil servants in the security sector will receive a “military salary concept” and its equivalent, covering various categories of benefits.

“In addition, the government has accelerated the acquisition of operational vehicles for middle management. Government is also instituting immediate measures to increase access to institutional housing and transportation for serving members of the security services,” reads some of the new changes.

“The security services sector also has access to the Housing Loan Guarantee Scheme to enable members to purchase houses in the areas of their choice, under the frameworks being finalised by the service Commissions and the respective, participating Financial institutions.”

Treasury will also extend the housing loan guarantee scheme to the rest of the civil service. Legislators and members of the judiciary have also been given 100% salary increments, medical support of up to 80%, the allowance to import one duty free vehicle and sitting allowances. Despite all this, Zimcodd said this was not enough to stave off the effects the depreciation of the Zimbabwe dollar continues to have on inflation.

“In as far as the 100% increment of salaries to civil servants is acknowledged, this is likely not to spur any meaningful results to the beneficiaries, but offer a temporary relief given the high inflationary environment. As of June 27, 2022, the official rate was US$1:362,6 against the parallel rate of around US$1: ZWL630,” Zimcodd said.

“In the same month, inflation was recorded at 191%, way above the salary hike awarded by fiscal authorities. Therefore, a salary increase that lags behind ever increasing prices cannot surely address the widening income inequalities and it means that public workers will remain worse off unless the government starts to give salaries pegged in US dollars to track exchange rate depreciation which is driving price growth.”

Zimcodd said any salary increment without addressing the root causes of inflation was dealing with symptoms and not the root problem.

“Furthermore, some of the measures to motivate civil servants like housing loan facilities, have been on the cards for quite some time while some incentives like duty-free motor vehicle import for civil servants are not practical given the real value of their current salaries,” Zimcodd said.

“As such, such elusive schemes may end up being abused by the top brass in government without gain to those on a low salary scale.

“The government must, therefore, prove beyond any reasonable doubt its commitment to transform these into lived realities and not just political statements.”

Zimcodd said even the commitment to cater for school fees for the civil service was dependent on the exchange rate that continues to change almost daily.

This comes as the cost of living is now over $120 000 for a family of six, according to the Consumer Council of Zimbabwe.

The Zimbabwe National Statistics Agency, however, reported that the cost of living rose to $92 125 for a family of five last month, up from $70 205 in May.

Another major change announced by the central bank was raising interest rates by a world record 120% points to 200% to tame triple digit inflation. Previously, the bank interest rate was 80%.

The idea behind the raise was to curtail private sector lending, which the authorities believe is driving the exchange rate, yet, statistics show that its actually the money supply creation from government through securities that is the driving force.

Looking at the central bank’s April Economic Monthly review, the annual growth in broad money rose to $671,37 billion up from a prior year and month comparative of $262,08 billion and $589,09 billion, respectively. This was largely driven by increases of 263,17% and nearly 241% in net claims on government and credit to the private sector, respectively, compared to the 2021 period.

“The annual growth in broad money was largely driven by increases of 263,17% and 240,68% in net claims on Government and credit to the private sector, respectively.

“Net credit to the government, however, included the accounting treatment of the drawdowns on special drawing rights allocated to the country by the IMF,” the RBZ said.

What the rate increase will do, however, is to impoverish consumers because out of the domestic credit to the private sector that rose nearly 15% to $367,18 billion from a March comparative of $312,32 billion, agriculture and household sectors received most of the benefits.

In a year-on-year comparison, the increase is nearly 241% up on April 2021’s comparative $107,77 billion.

“Credit to the private sector mainly benefited the agriculture and household sectors, which received 26,06% and 22,09% of the total credit, respectively,” the RBZ said.

Thus, consumers using loans to deal with a soaring cost of living will have to think twice because they will have to pay $3 to every $1 of money borrowed.

Consumers have used personal loans for mortgages, vehicles, small businesses and healthcare costs.

Experts expect the Zimbabwe dollar to continue falling, before stabilising in the short term then depreciating once more.

That is why government is being encouraged to implement internationally recommended reforms around debt, politics and the economy.

  • This article was taken from the WeeklyDigest, an AMH digital publication