Holistic approach key to economic revival

WE HAVE seen and heard enough to comment, predict and even advise on how to avert an economic crisis. From the great depression of 1929 to the Asian financial crisis of 1997 and recently, the global financial crisis of 2008, the trend is almost the same.

An economic crisis usually starts with some trigger event(s), followed by market reaction, which degenerates into the real crisis. Even the Zimbabwe financial crisis of 2008 followed the same sequence. Trigger events are normally some market disruptive forces, common among them being the crush in the stock market prices, spike in oil prices and the crush in housing prices. Any supply and demand disruptions can potentially trigger a crisis.

The market reaction could be real or just panic, which accelerates the problem. What is particularly important today is the role of social media in both triggering and accelerating a crisis.

The world of information technology is evolving fast and information can be spread quickly. As such, we cannot ignore the influence of social media in the current market turbulence that started with what could be over-hyped stock market exuberance, which was used to project an economy fast tracking back to the historic 2008 economic crisis.

This could have triggered the massive depreciation of electronic money and bond notes on the black market. Within a week these two forms of currencies had lost almost half of their exchange value to the US dollar.

Currency depreciation was followed by temporary panic hoarding by some of basic food staffs and necessities. Again we cannot ignore the influence of social media on this market reaction. As expected, shortages of some basic food staffs and necessities started to emerge and this was followed by a bout of price increases.

While the economy is under stress, the situation is unlikely to develop into a crisis similar to that of 2008. Unlike in 2008, the Government cannot print money or continue borrowing to support excessive consumption in the economy. It has almost reached its full capacity to borrow or print Treasury Bills (TBs) since the Public Debt Management limits the stock of public debt to 70 percent of GDP at the end of the fiscal year and its overdraft with RBZ to 20 percent of previous year’s budget.

The Government is currently operating close to the ceiling of its borrowing limits, so any price increases would be unsustainable owing to difficulties of growing money supply to support its programmes. Clearly, consumers stand to lose more by hoarding products.

They may not be able to buy enough goods to last them until the end of the crisis. Neither would they be able to purchase enough foreign currency to sustain them to the end of the crisis. As such panicking is largely discouraged, as it only aggravates the problem.

Equally, there is need for urgent intervention by our policymakers with both short and long term measures. The Reserve Bank of Zimbabwe should be commended for its quick intervention to finalise the formalities for drawing down on the Afreximbank Nostro Stablisation Facility of $600 million. This facility will undoubtedly go a long way in easing the foreign payment backlog, with a huge impact on the current madness on the parallel market for currencies. Coupled with the injection of an additional $300 million bond notes, off course in a measured manner, we are likely to see the normalisation of both the availability and prices of basic commodities.

It is always important to understand that Zimbabwe may not be able to sustain dollarisation in the absence of access to USD capital markets.

All successfully dollarised countries like Panama have access to US dollar capital markets. The unbalanced state of the Zimbabwe economy, typified by high levels of consumption and imports unmatched with the production and exports levels, makes it more vulnerable to liquidity and crisis.

That is why it is always important for the country to maintain good relationships with external financing partners. Commendably, the RBZ has so far managed to ride on the Governor, Dr John Mangudya’s relationship with Afreximbank, his former employers, for facilities that are currently sustaining the country. However, it is always advisable for the bank to broaden its list of financial partners for liquidity support in the current environment. It is comforting to note that there are efforts to achieve this at the RBZ.

While the RBZ is trying hard to assist business attain capacity to earn foreign currency or minimise usage of hard currency in the country through priority allocations, it is discomforting to note that some beneficiaries are abusing these privileges to fuel the black market for currencies.

A notable example is that of artisanal and small scale gold miners who were being allocated 100 percent cash for their gold sales to Fidelity Printers and Refiners, which they mostly trade on the black market. This could be the reason why the RBZ is revising down cash allocations to this group to 60 percent with the balance payable as electronic money.

However, the timing of this review is important to minimise worsening of the problem, as gold dealers would simply offer cash for gold purchases, which they will then smuggle for competitive prices in mainly South Africa. This would worsen the problem noting that artisanal and small scale gold miners now contribute about 47 percent of gold revenue. It is therefore advisable for the RBZ to wait until the market subsides after the injection of the $600 million facility and $300m bond notes, mentioned earlier. It is also advisable for Fidelity Printers to increase its activities in the gold mining value chain from provision of funding support to marketing so as to minimise smuggling.

Farmers who are benefiting from the special cash allocation and abusing it should be equally dealt with. The same applies to people using their influence and muscle to obtain cash from the banks and trade it on the parallel market for currencies. Clearly, dealing with such culprits requires commitment from top Government officials. Otherwise the country will continue to see new, crisp and sealed bank notes on the streets and wonder why.

Surely, with cash of $1bn in circulation, Zimbabwe should not be experiencing such big cash crisis. That is why it has become necessary for law enforcement to flex their muscle by imposing long jail terms for perpetrators. Again there is need for commitment from everyone in Government to do more to stem out these nefarious activities noting that the major culprit are those influential with the necessary connections and means to do so.

Equally important is to deal with allocation as some unnecessary items continue to be high on the RBZ cash allocation list. A look at the cash allocation for the 6 months to 30 June 2016 show that about $731 million out of a total of $2,96 billion cash allocation went towards undisclosed others uses, which are not basic necessities. This underscores the need to reduce dependence on imports especially on the part of the Government, through implementation of 30 percent local procurement policy. What is also worrying is slow pace to adopt new business models in line with the current economic realities. After a long period of being protected by the SI64/2016, it is disconcerting that oil expressers are still importing the bulk of their crude oil for the manufacture of cooking oil. By now these should have entered into contract farming of soya beans to preserve foreign currency. Instead the RBZ had to intervene recently by increasing forex weekly allocation for this group to $15 million from $10 million as a way of increasing supply of cooking oil in the market.

While these short term measures are necessary to avert a crisis, the permanent solution lies in rebalancing the economy towards increased production and exports whilst addressing some structural challenges in the economy. Achieving the required economic rebalancing requires implementation of sound investment and business policies to attract and retain both local and foreign capital, mainly FDI.

◆ Persistence Gwanyanya is the Founder and Futurist of Percycon Advisory Services. For feedback WhatsApp on +263 77 3 030 691 or email on percygwa@gmail.com.