EDITORIAL COMMENT: Treasury measures offer path to stability Prof Ncube

The wide-ranging set of measures announced by Minister of Finance and Economic Development Mthuli Ncube on Monday flesh out recent policy statements and make fundamental changes to economic management.

We need to finally stop what we have been seeing in recent years, cycles of nine months of relative stability, followed by three months of runaway inflation, and then the cycle restarting once the inflationary spiral has burned out and the speculators have been beaten back.

Fairly obviously we need something a lot better and inherently more stable where inflation and exchange rates map the fundamentals, which in the case of Zimbabwean fundamentals under Second Republic discipline should result in modest although continuous changes. 

If we get it right speculators and manipulators will not be able to act effectively.

The Minister’s programme has several aspects: More use of local currency; the Finance Ministry managing all aspects of foreign debt rather than just the budgeting; ensuring that creation of money supply is made impossible in many areas and severely curtailed in the rest; and switching the foreign currency auctions from the main supplier of foreign currency to net importers to being the price setter with the currency coming through the interbank system.

The proponents of redollarisation are once again howling for all payments in US dollars. They forget the economic meltdown the last attempt produced and who forget that it only really worked even in a sub-standard way because the inclusive government, where opposition parties controlled most economic ministries, were prepared to create what amounted to fake US dollars, a programme that was continued up to the end of the first republic.

To get decent growth rates we need our own currency, although the economic fundamentals have to be managed. Now that all Government and parastatal fees charges are to be made in local currency a lot of the redollarisation drive is stymied. 

There will be some interesting results as those who think they exist in a US dollar environment will have to sell US dollars and buy local currency if they want their lights on, or travel on a new passport.

They can do this easily at their bank, at the bid rate on the interbank market, slightly below the mid-rate that forms the official rate. 

Some will, of course, follow their peculiar belief that the black markets are the ultimate markets and they will find some startling facts, the biggest one being that traders in those markets offer far less for a US dollar than they sell that same US dollar for five minutes later. 

There is not just a premium on the official rate, but possibly an even bigger premium between the bid and ask rates. No one is going to join the sellers of US dollars on the black market in their tears.

The foreign debt now becomes a total Finance Ministry function. It is already budgeted for. Sovereign debt servicing requirements, along with Government pensions and the salaries of judges, the President and Parliamentarians are lumped together at the front of the national Budget as Constitutional and Statutory Provisions. 

This means they are not approved annually by Parliament in a Finance Act like the far larger ministry budgets.

The provisions are set in the Constitution and in certain laws and last until these are amended. They are what have to be paid, regardless of what anyone thinks, and in some countries in the old days were tied to the customs duties that were set for an entire reign so the money was always there.

What has now happened is that the Finance Ministry will be buying the surrendered 25 percent of export earnings using tax revenue, and that revenue is already supposed to be budgeted for this purpose, and then using this foreign currency to service our foreign debt. 

This replaces the previous system where the Reserve Bank of Zimbabwe bought the 25 percent, even if it was fully liquid to do so. 

Economists have been concerned that while the Reserve Bank was supposed to recycle the local currency it received from auction bidders to buy more foreign currency, the falling value of the Zimbabwe dollar and the rising exports created gaps that were filled with bookkeeping entries, potentially raising the money supply.

Zimbabwe has been in detailed negotiations with creditors over sorting out its debt arrears, and a lot of progress has been made. 

Creditors generally accept that Zimbabwe is a going concern now, and that what is now needed is the detailed plans. But that means we have to remain deadly serious, and assigning a quarter of exports to the existing debts and future debts definitely shows that.

As our debt arrears are sorted out it is now clear that there enough votes for use to enter new programmes for low interest, exceptionally well-managed infrastructure loans. 

This means we can fund far more cheaply new dams, new power stations and new roads, being able to pay back the money as we sell the water, sell the power and toll the roads. This is how everyone else does it. We just have to ensure our management is perfect.

For some time, the foreign currency auctions under a sort of managed Dutch auction have been supplying most of the foreign currency needed by priority importers. There have been problems with the management of the auctions trying to take into account demand as well as supply.

The new system does away with all that. A fixed amount is made available each week, and this is now being cut to US$5 million for a while. That will set an exchange rate. 

But obviously it is not enough money and here the second half of the policy comes into effect. 

Net exporters can continue to use and spend the 75 percent of their export earnings they retain but only for 90 days. 

At the end of that time whatever is left from date a payment was made into a Zimbabwean bank has to be sold on the interbank market. 

Obviously many exporters will be going further than just paying their foreign currency bills in the 90 days. They will also be able to buy goods and services locally, either using the foreign currency, which the vendor will be able to keep 100 percent for their own import needs, or selling the currency on the day of payment. 

It does not really matter since what will be happening is that a far higher percentage of export earnings will be entering the formal private-sector economy, either directly or via the interbank system, with those pure Dutch auctions setting a price.

This is how most countries operate, with the interbank system coping with the inflows and outflows and none of the dual currency approaches we have used for some time. 

We still need the pricing auctions, at least for a while, but hopefully we will be moving into the sort of territory occupied by most of the world sooner rather than later.

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