Currency should not be Zimbabwe’s main election worry, but policies

by Justice Zhou

Zimbabwe’s national election campaign season is now in full swing, with quite a number of presidential wannabes, including prominent economist and former minister of industry and trade, Nkosana Moyo, having thrown their hats into the ring.

Through the crystal ball of the average Zimbabwean, it’s easy to foresee that the economy will feature prominently on the campaign trail, something which has become a familiar mantra since the country buckled under its decade-long Great Recession.

Nevertheless, the pre-election drama itself is a mere sideshow. Bond notes—Zimbabwe’s stand-in derivative currency—also isn’t what we should focus much of our worries on, if they indeed are just a stopgap  that would soon be withdrawn from the system.

Perhaps such worries are prompted by the misplaced belief that the central bank alone can be the ultimate solution to our economic problems. 

Rather than relying too much on or hoping that looking only to the central bank is the way to go, we should to a larger extent hold the treasury and government responsible for the well-being and general performance of the economy.

If we direct most of our scrutiny and expectations on the responsibility to deliver on positive results only towards the reserve bank, then we are simply keeping the treasury, which has not lived up to its duty and outcomes, off the hook.

The treasury and reserve bank should complement each other in executing macroeconomic policy objectives. They must act in sync when finding ways to stabilise economic cycles or recession and to avert the vagaries of runaway inflation.

In the run-up to elections, politicians often have a bad habit of preferring monetary to fiscal policy so as to shift the responsibility of creating jobs and stimulating economic growth from them to central bank policymakers. 

Suggesting or hoping that the reserve bank will create the much-needed jobs and stimulate growth alone is a complete fallacy.

In theory, the Phillips Curve is used to argue that an inverse relationship between rates of unemployment and corresponding rates of inflation exists within an economy. In practice, latest studies have proven otherwise.

In fact, it is in the area of combating runaway inflation or maintaining the stability of prices and manipulate interest rates, that the central bank’s role can have a major impact. Politicians know full-well that the fiscal policy response of boosting taxes and cutting government spending is an elephant in the room when it comes to winning the support of voters.

Just for the record, the primary mandate of the Reserve Bank of Zimbabwe is the formulation and implementation of monetary policy, directed at ensuring low and stable inflation levels. A further core function of the bank is to maintain a stable banking system through its supervisory and lender of last resort functions.

Of course, fears that the government may try to cut corners and monetise its staggering sovereign debt by printing bond notes “out of thin air”, hence stoking hyper inflation in the process, are genuine to some extent.

However, there is no compelling evidence suggesting that the reserve bank policy makers will suddenly defy the fundamentals of logic and let history repeat itself. Allowing themselves to be used as political pawns by the incumbent government in the run-up to the elections will only sound a death knell to their credibility.

Here is how the bond notes conspiracy theory goes: If the ruling party elites decide once again to arm-twist central bank policymakers into printing money to fund the budget deficit, it would be a political illusion that only serves to transfer debt from the treasury to the reserve bank without proffering any solution.

If that happens, it would be a trick! Monetising debt would probably involve a two-step process whereby the government simply issues debt instruments, supposedly through open market operations, to raise money for its expenditure programmes, then the central bank purchases the debt, holding it until it comes due, and leaving the system with an abnormal supply of money, thereby stoking hyperinflation.

However, while possible scenarios in the pre-election period are just as worth putting into perspective, it remains my  strong conviction that what really  matters here is whether the leader and government that are set to assume power in the upcoming polls have the ability and temerity to put the economy back on the recovery path.

A new government will be confronted with an unenviable task of ensuring that it tackles unemployment rates of roughly 90 percent, frequent electricity outages, a budget deficit that has shot up to over $1.4 billion, a rapidly-shrinking tax base, a yawning current account deficit, low production levels, capital flight, cash shortages, to name a few.

At $1.4 billion, the deficit is about 10 percent of GDP, way above previously revised estimates. Reducing or rolling over this debt has, therefore, become a major policy objective which the current government has failed to meet. Treasury bills worth about $2,1 billion were issued in 2016 to honour a $1,7 billion national debt and to finance the previous year’s $356 million budget shortfall.

That Zimbabwe’s inflation rate slowed to 0.14 percent year-on-year in July from 0.31 percent in June, according to data from the national statistics agency, provides proof that bond notes may not necessarily be the hyperinflation bogeyman that the herd-mentality claims to be. 

If any, an increase in inflation will mean that there is a decline in the purchasing power of money, reducing consumption and in turn GDP. High inflation hurts the poor, who unlike their wealthy counterparts may not have asset to hedge against it. It also makes investments less attractive, due to the future uncertainty it creates.