Who will tame the elephant in the room?

Reserve Bank of Zimbabwe (RBZ)

INFLATION, Milton Friedman cautioned, “is always and everywhere a monetary phenomenon”.

The two economists heading Zimbabwe’s central bank and Treasury understand this all too well.

In fact, Reserve Bank of Zimbabwe (RBZ) former governor Gideon Gono startled the nation by claiming that Zimbabwe could have 14 million different governors and they would not be able to tame the elephant in the room.

The big elephant in the room is government’s profligacy, its insatiable quest to spend beyond its budget. It is its reckless indiscipline.

Take, for example, expenditure on agricultural inputs for Pfumvudza to 3,5 million households when Zimbabwe has 3,8 million households.

There is political desperation brought about by government’s political insecurity.

It is no coincidence that since 1990, politically-motivated printing of money has never stopped. It has gotten worse.

Last weekend, we woke up to the news that Zimbabwe has officially entered hyperinflation.

American economist Steve Hanke has it at 1 220% per annum.

Government’s own figure is at 86%. As prices change thrice a day in supermarkets, it is easy to see government’s lie.

The banks, in a bid to protect the domestic nostro accounts or the American dollars in the formal system, have ring-fenced real dollars from Zimdollars. There is an impending threat that requires the financial system to be ever more diligent.

As of March 2023, Zimbabwean nostro total deposits were US$2 billion, supported by US$1 billion in actual physical cash and cash held in foreign banks offshore.

The difference between total deposits and cash is credit deposits of US$1 billion, which is money created by the banks.

At 50% ratio, this is a very healthy position, at least as of end March 2023.

Notable is the decline in cash from US$539m in March 2022 to US$457m in March 2023.

However, offshore cash has increased by US$80m.

The nostro balances in the overall banking system are safe.

But the overall position may not be true for individual banks.

But, there is a real threat to the nostro system from two principal sources and these are:

(a) Civil servants salaries, and

(b) Barbarians at the gate

Civil servants’ US dollar salary transfers from Treasury if not backed by real US dollars are a problem.

The salary payments range from US$100m to US$150m monthly. 

This mishap occurred in 2019 and created a hole that was taken over as debt by RBZ.

Therefore, government must support salary payments with real dollars.

The big worry is the barbarians at the gate. Whenever the official exchange rate moves the way it is doing, the threat of shenanigans rises.

It can happen either with Zimdollars or local nostro Treasury Bills.

Back in 2019, the International Monetary Fund warned the Zimbabwean government and RBZ that Sakunda Treasury Bills of US$366m would crash the monetary system.

The current turf wars between RBZ and Treasury speak to the inherent threat to the system.

Can the banks and RBZ stop the politicians in an election cycle from gatecrashing?

What is the solution? The governing elite has an existential crisis and the country has been unable to provide them with a viable off-ramp, the same way China provided Mao Zedong and the old guard an off-ramp. Zimbabwe requires a Lancaster House kind of settlement.

The late former Rhodesian Prime Minister Ian Smith and the white community had an existential political crisis and held on to the levers of power to secure themselves.

The Lancaster House settlement was a viable off-ramp. As long as the political threats remain, real or imagined, then the printing will never end.

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