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Bernard Bwoni Correspondent
Basic monetary theory will tell you that when an economy is struggling as what is happening with the Zimbabwe economy, the solutions are not always going to be pretty or pain-free. Those solutions lie in an aggressive monetary stimulus initiative. The bond notes, as anxiety-provoking as they may be, will offer the much needed short-term to long-term relief to the cash challenges facing the country.
The RBZ Governor has repeatedly articulated this with authoritative clarity. The bond notes could easily be viewed as an extension of the bond coins and the idea is to address the cash shortages in the country. It is not only about alleviating the cash shortages, but also to stimulate economic growth and curb the illegal slippages of the USD out of the country. The strong dollar is particularly a significant problem for Zimbabwe’s economic growth. The value of the USD is far too high for a country like Zimbabwe.
The country is fundamentally uncompetitive and this is reflected in the country’s huge current account deficit. Zimbabwe at the moment is unable to determine or pursue any expansionary fiscal policy, hence the continued fall in economic growth. The Reserve Bank has no independent monetary policy and Government has very little if any fiscal space. There are structural problems that need to be dealt with as the long-term solutions. The Government should be looking at reducing the bloated public sectors, lowering the very high national debt, improving tax collections, executing projects that inject money into the economy and continue to encourage foreign investment.
However, these structural issues require time and ideally should be tackled when the economy has some level of stability and is strong enough, rather than when it is at its most vulnerable. The Government is burdened with fiscal inflexibility and financial asphyxiation due to the multi-currency regime. At the moment cheap imported goods are being dumped onto the market, cash is not making it into the financial system and there is an urgent need to curb the trinkets that are making their way onto the market to the disadvantage of the domestic producer. The issuing of bond notes as an incentive for exports to stimulate growth is positive and requires national support.
The strong USD is not entirely good for exporters as prices for locally produced goods are going to remain high. This is because when the cost of production is high, prices of goods will also be high. When prices of goods and services increase, demand for those goods and services will decrease. That gap created by the expensive locally produced products is then filled by the cheap imports that are strewn on every street corner and supermarkets in the country. The outcome is reduced economic growth as happening in Zimbabwe right now. Economic growth is a cyclical process of increasing employment opportunities, production and consumption of goods and services.
This is exactly what is being referred to when people talk about Zimbabwe’s economic growth potential. The stimulus initiatives being put forward by the RBZ are looking at addressing those economic fundamentals to kick start the country’s economic growth. The bond notes incentives are meant incentive and increase exports. The idea is to start producing those goods locally and cheaply, that they are priced competitively for both domestic consumers and for export. That way the economy will start to grow. People are rightly questioning and challenging the Government to create jobs and only a growing economy will create jobs. An economy with a strong currency such as the USD and lacking the fundamentals for economic growth will inevitably struggle to take off. The initiatives being put forward by the RBZ are meant to increase production and with increased production comes increased sales and job creation. When people have jobs they have money to spend and with availability of money to spend on goods and services also increases. At the moment, supermarkets and shops are filled with goods, mostly imported, but people have no money to buy these goods and services.
The albatross around Zimbabwe’s economic growth is unfortunately the impact of a very strong currency which is bad for the country’s highly dollarised export economy which pays its workers in USD but sends its exports to countries whose currencies are weaker. The domestic manufacturers have repeatedly lamented that their competitiveness has been eroded by number of factors, some of which relate to the strong dollar. The effects of the strong dollar have meant that exports are curtailed, it’s cheaper to import than buy locally produced goods. The impact is felt by local producers because more imports cause a reduction in demand for their goods.
There are also benefits to the consumer as well from a strong USD especially when they go outside to purchase goods and services. The cross-border traders benefit from the strong dollar especially with the current decline in the value of the SA rand. The sad reality is that this is in a way exporting hard currency to an outside economy and in so doing Zimbabwe is exporting employment opportunities to that economy. When people go to SA with dollars to purchase goods for resale back in Zimbabwe, they are in fact propping up that country’s economy. These are basic economic fundamentals.
Buying goods produced in SA for example with USD earned in Zimbabwe means we are boosting sales for SA firms, increased sales for SA firms means more employment opportunities for that country not Zimbabwe. These are some of the structural problems affecting the Zimbabwe economy. The imported goods bought in South Africa and sold on the street and markets in Zimbabwe are cash transactions and that money is unlikely to go into the monetary system. The new dollars earned in those street cash transactions are again taken to SA to buy more trinkets and the cycle begins again. This sustains livelihoods but the effects economy wide are profound.
The USD has its advantages and one of the advantages is the availability of goods in shelves which is important. It’s cheaper to import with the dollar and hence the country is unlikely going to face the shortages it did that period leading up to 2008. The problem for consumers is the availability of money to buy those goods and services. With no intervention, there is no end in sight to the country’s economic difficulties. The bond notes as a transitional solution could potentially plug the gap. With its multicurrency basket, in particular the greenback, Zimbabwe basically imported deflation. The solutions being proposed by the RBZ have the potential to initiate the stimulation of the economy as the bond notes will be issued as an incentive to promote exports, stimulate and stabilise the economy.
The country is importing some basic products that could and are already being easily manufactured in Zimbabwe. The strong USD means that Zimbabwe-made products will become more expensive for the rest of the world and to domestic consumers who will just embrace the cheap imports into the country. This affects domestic producers who may be forced to close shop as many have already done. This has a knock-on effect on employment and spending because with reduced manufacturing comes a reduction in employment opportunities and with no jobs consumer spending power is eroded. This means economic growth is hindered. Zimbabwe is a commodity exporter, the international markets price commodities in USD and a strong dollar will make commodities more expensive for other countries. This affects the country’s exports and reduced exports and increased imports created a negative current account.
It is an open secret that the multicurrency has imposed limitations on the Government’s ability to conduct the country’s monetary policy. The dominance of the greenback in Zimbabwe has seriously impacted on economic recovery and economic growth by imposing severe liquidity constraints.
The current cash shortages and USD outflows are some of the shocks associated with a highly dollarized economy. The Government control over such shocks is very limited due to loss of control over monetary policy. The proposed introduction of bond notes is a clever but short term solution to an even bigger problem created by the multicurrency system. This is a first step in laying foundations for policies that would potentially give the reserve bank more access to monetary control in the country. The thing with most innovative ideas is that they do go through stages of being ridiculed, discussed and eventually being accepted. People take time to warm up to new ideas and/or anything new. There was even a time when zippers were first introduced on clothes, they were denounced as lures of the devil but today even shoes have zippers.
Business thrives under conditions of certainty and unfortunately that has been lacking in Zimbabwe. To give credit to the RBZ, the Governor has been reassuring the public and working on building confidence in the Zimbabwe economy. The bond notes injection will offer incentives for exporters to become more efficient and productive. Foreign investment follows confidence and stabilisation of the Zimbabwe economy is most likely going to further enhance business confidence. The dialogue on bond notes should continue, the niggling issues and misunderstandings clarified further. When politics and economics clash, there is always one winner and that is economics. It is a long process but politics can initially cloud very good policy initiatives and in the midst of all, aims and objectives may be lost. If only the bond notes issue could be discussed without the associated political noises. The priority is prompt and concrete solutions to the cash scarcity in Zimbabwe. The nearly over 90 percent circulation of the greenback in Zimbabwe has attracted people from different countries who bring in their goods onto the market. These people are not bringing any value to the Zimbabwe economy, they simply ship out the dollar and we are left with the cash shortages.
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