New perspectives

For decades Zambia suffered exactly the same inflation as Zimbabwe is now suffering. But it managed to crush inflation, according to Caleb Fundanga, former Reserve Bank governor in Zambia.

Fundanga is a renowned economist who has served in many international positions over the last few decades as a high level monetary specialist.

He participated in a very useful dialogue on the future of Zimbabwe’s economy this month organised by the Southern African Political Economy Series (Sapes).

Zambia went through exactly the same problems as Zimbabwe, but managed to overcome them very successfully.

Now the Zambian economy has stabilised.

Zambians prefer the Zambian kwacha to the United States dollar.

The US dollar is much more readily available in Zambia than in Zimbabwe, including to individuals, middle scale and large scale companies and investors.

People prefer the Zambian kwacha because it is now much more valuable than the US dollar.

Yet Zambia earns less forex than Zimbabwe. How did Zambia do it?

Fundanga emphasised that first and foremost the importance of the government’s annual budget, its “fiscal reliability”.

That means that whatever is agreed in the budget by Parliament and by the country as a whole must be kept to religiously.

Unlike in Zimbabwe in recent years, the amount provided and agreed in the budget cannot be changed suddenly and irregularly.

He made it clear that government is the main and most important institution in any country which can establish currency stability.

He emphasised that government of Zimbabwe, like most governments in the world, is the biggest “company” in the country with the largest number of employees.

What it does seriously affects the whole economy. Governments everywhere are the key to economic development.

Zambia behaved in exactly the same way as Zimbabwe for decades, causing inflation and economic instability.

As in Zimbabwe today Zambia used the local currency, the Zambian kwacha.

Instead Zambians preferred forex, especially the US dollar.

In fact the Zambian “kwacha” used to be viewed as equivalent to useless money.

Government stopped printing more and more kwachas and decided instead to transform itself to a “fiscally responsible” government, i.e. keeping to the amount of money it agreed to utilize in the first place.

In other words, it is the government which must establish the stable system for the currency.

You can compare the government budget to your own personal budget: you are fiscally responsible if you use the money you have instead of borrowing recklessly for extra expenditure.

Some people borrow money to change to a better refrigerator or a better car, but they are not using their own money and put themselves into debt.

Later they may lose the new refrigerator or car if they fail to pay the debt.

This is exactly the same situation as countries.

Fundanga mentioned briefly that the government budget needs to be worked out according to its economic production:

Zimbabwe produced cotton and once had some of the best textile companies in the whole of Africa, such as Cone Textiles and Tanganda tea is recognised as the best in the world.

Zimbabwe produces Mazoe Crush utilising its own sugar and this was wanted by all of its neighbours; it produces gold and platinum now wanted all over the world.

Zimbabwe used to be “the land of opportunity”, his actual words.

It had the raw materials, which it could and can utilise for its manufactured goods.

He also mentioned that it is well known that most of Zimbabwe’s forex earnings are in rand, quoted at the meeting at about 40% of the total earnings; followed by US dollars, quoted as 20%.

These figures give an idea of what the Zimbabwe’s government’s actual earnings could be, on which it can decide on exactly how much it can afford to plan for its national budget.

In other words the government’s budget must be based on actual agricultural and industrial productivity.

In the brief time he was given he did not work out what and how the expenditure would be decided upon.

Obviously this is critical, particularly in Zimbabwe which has a very large state bureaucracy of 550,000 personnel.

In the Zimbabwe Ministry of Primary and Secondary Education in the last few years for example, salaries amounted to 90% of its budget, leaving nothing for textbooks and other items essential for efficiency and effectiveness.

Education changed from very efficient and effective to very inefficient and ineffective.

Without textbooks education cannot succeed.

Fiscal planning and expenditure are, according to Fundanga, the heart and soul of the economy.

Another solution agreed upon by all speakers in the Sapes dialogue, was the issue of establishing a currency board, whose rules, principles and protocols would be jointly agreed upon by creditable and specialised institutions such as international, African and regional bodies, and accepted by most well run governments, and this should include the government of Zimbabwe.

The currency board or boards cannot change these rules, principles and protocols haphazardly as has been done by unstable economies and currencies.

As we know the forex rules in Zimbabwe have been changed frequently and without clear explanations.

Fundanga pointed out that in the case of Zambia, it began by retaining state control of the exchange rate through the Reserve Bank governor and the auction system, but allowing a number of banks to establish such currency boards within their banks.

However, he said the auction system depended on its rules, regulations and processes, and needed to be more trustworthy and dependable.

Such dealers would allow clients to open different accounts both to deposit and obtain forex.

For example you could have a Zambian kwacha account, a US dollar account, and a Sterling account.

You can keep different amounts in these accounts, and exchange the amounts from one currency to the other as they were available within that bank.

You can import and export goods through these accounts.

The amount each bank was allowed was limited, whilst central government could do larger amounts.

However as time went on the various banks became more successful, and managed to transfer more funds both ways than the central government.

They were regarded as more efficient and dependable, and could do such transfers very quickly.

Fundanga emphasised it is not possible to overcome currency fluctuations and inflation instantly and overnight.

It may take a couple of years. In the case of Zambia he mentioned a five year period. The old Reserve Bank and state controlled auction systems continued, and still continue, but the establishment of currency boards in many ordinary banks, allowing them to deposit and transfer forex for smaller amounts was salutary.

This was the system before and immediately after independence, and should be resumed.

It means that Zimbabwe already has a lot of systems and experience in what guaranteed Zambia’s success.

Chung was a secondary school teacher in the townships; lecturer in polytechnics and universities; teacher trainer in the liberation struggle; United Nations civil servant and Primary and Secondary Education minister.

*These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe.

Email- kadenge.zes@gmail.com and mobile No. +263 772 382 852