Back in the soup

WHO could forget 2008? 

We had inflation so high we had to double Z$ prices every 4 hours, we had 150 000 cases of cholera in Harare. Our fuel filling stations were all empty and closed, our supermarket shelves were also empty. We were even buying bread in neighbouring countries. Even today, I have no idea how we survived. The Reserve Bank of Zimbabwe (RBZ) printed a note with a face value of 100 billion Zimbabwe dollars. Hard to even imagine.

I was a Member of Parliament for the MDC and sat on the front benches opposite Hon Patrick Chinamasa, the then Finance minister. On February 17, 2009, he stood up and made a short statement. In that statement he announced that with immediate effect he was:

*Lifting exchange control on all current account transactions;

*Abandoning all attempts at price control;

*Allowing the use of seven currencies for local transactions, including the US dollar and the South African rand;

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*Introducing a free market for the purchase and sale of gold.

In the following 10 days, fuel came into free supply at international prices. In 45 days all supermarkets were fully stocked and operating at US dollar and rand prices. In 180 days, we were almost 100% dollarised. Immediately, inflation disappeared and in that first year it was -7%. No International Monetary Fund rescue package, no credit lines in our banks, just plain market forces at play.

In the past week, we saw a flurry of emergency meetings after most major companies warned that they faced closure. The reason was simple, we introduced a new local currency in April and its value in the open market was depreciating fast. RBZ chief, like King Canute, sat in his tower in Harare and demanded that companies trade in the new currency at 14,8 to 1. The central bank started to take in 25% of all export earnings (US$2 billion a year) and paying for the currency in ZiG at 13,6: 1, even using Treasury Bills to settle these liabilities with a low interest rate and not tradeable, with a liquidation life of 1 to 2 years.

Companies were fined for not selling in local currency or selling things in that currency at a market related rate. Managers were threatened with imprisonment if they did not comply. Open market traders walked in and bought everything in sight in ZiG, took them to the open market and sold them in US dollar, changing the currency back to ZiG and repeating the process, often selling the products on the open market for less than cost.

Since April this year (5 months) the proportion of formal sector sales in US dollar went to 20% from 85%. 

 When companies went to their banks seeking the foreign currency they needed to restock, they could not access even a tiny proportion of what they needed. By September 2024, most companies were complaining about their large balances of ZiG and shrinking stocks of everything. Smuggling across or through our borders was rampant, formal sector stores had to raise their prices in US dollar to compensate for the losses in ZiG. Inflation re-emerged in both ZiG and US dollar terms.

Inevitably the crisis reached a point where it could no longer be ignored. The President (Emmerson Mnangagwa) cancelled his trip to the United Nations General Assembly and called a series of meetings to try and find a way forward. Eventually the RBZ issued a statement enforcing the following: 

Devaluing the ZIG to 25: 1. Increasing interest rates from 20% to 35%, increasing the balances that had to be held by the RBZ in terms of bank deposits. Further restricting access to hard currency by limiting the cash we can take out of the country when travelling.

I do not know how this package came to be accepted or who was involved, but not a single one of those decisions will have any impact on the present crisis and in fact they make the present situation much worse. Every bank balance in ZiG has been devalued, the hundreds of millions of Treasury Bonds or Bills in ZiG being held by exporters and other forms of State debt, have been wiped out with dramatic impact on balance sheets and profitability. Workers and pensioners who were paid in the past 10 days (virtually all of them) and were paid in ZiG, have had their salaries devalued. Prices in ZiG went up in 24 hours.

I find this extraordinary as no other African State has such problems, even Somalia and every one of our neighbours, who at one time were having similar experiences, have adopted policies which now deliver stable prices and exchange rates. What is wrong with us? It's not our economy that is not doing well, it's our government and its leadership.

If you are going to complain about something you must offer a solution. I have been stating for many months that the only way to manage fiscal and monetary markets is to adopt the following measures: 

Fiscal: There is ample evidence that government is not controlling expenditure within its capacity to raise taxes. We, as a country, ran a fiscal deficit of 9% on average for the first 20 years of independence, this was not sustainable and when it finally caught up with us our currency crashed and with it our economy. Fiscal discipline is essential going forward. The practice of incurring liabilities and then settling these with Treasury instruments, must stop.

Monetary policy: There is ample foreign currency in our markets to make our own currency so strong that we should be buying in hard currency to keep it weaker than the market will allow. There is no mystery behind the fact that the Rhodesian dollar was always twice the value of a US dollar. It was far too strong and we should have followed monetary policies that allowed us to build reserves and stimulate exports and constrain imports. 

That is what all Far Eastern tiger economies are doing, China and Japan included.

To achieve stability the following policy changes are needed. The approach has to be holistic and deal with all the elements involved. If not, no package will work.

Exchange control: This must be abandoned on the current account. Some control on the capital account may be necessary. Export and import permits should be discontinued, they are not necessary and just increase the cost of trading.

The interbank market for currency should be totally liberalised, no control at all, currencies on the market should be allowed to find their own exchange rate based on market forces.

All incoming foreign exchange from trading should be converted to local currency on arrival and the company credited in local currency at the market rate of the day.

All domestic transactions, including all markets, all local and central government transactions should be in the local currency.

Foreign currency should be available on demand at all banks and Bureaux de Change at the market rate of the day plus charges.

Nostro accounts should be retained and clients should be able to bank hard currency that is not a receipt of an export or a hard currency transaction for local services. This will include all remittances.

Government must take steps to plug all leakages in the local market. These are estimated to involve up to US$6 billion a year.

The sole role of RBZ will be to manage the banking system and to set a target rate of exchange for the local currency that is deliberately set at a level which will keep it undervalued. 

They will maintain this rate by buying hard currency off the interbank market on a daily basis and accumulating reserves. The bank should see to it that adequate supplies of paper currency and change is available for all domestic transactions in cash. Transactions in electronic form should be encouraged.

Do that and I can guarantee that ours will be a different country in 24 hours.