A victory lap that won’t age well

19 Aug, 2022 - 00:08 0 Views
A victory lap that won’t age well

eBusiness Weekly

Over the last week, the shortage of Zimbabwe dollars (ZW$) has seen a retreat on the parallel market from 800 to below 750. This almost 7 percent decline has Treasury and the Central Bank taking a victory lap for the recent policy actions that have driven this market re-rating.

The drastic action to stop payments to all Government suppliers is likely the main driver of this outcome. Sixty-70 percent of the ZW$ economy is Government of Zimbabwe (GoZ) business, and therefore it stands to reason that should ZW$ not be forthcoming from this fountain, the market would be short and demand for everything that is purchased with ZW$, including the US dollar (US$), would ebb.

Do leopards change their spots?

The fundamental question here is whether the current correction we are observing on the parallel market is a critical turning point for the fortunes of the ill-fated ZW$ or just a bear market rally?

After all, this is not the first time we have seen the ZW$ bounce back after some aggressive regulatory initiatives by either the Ministry of Finance (MoF) or the Reserve Bank of Zimbabwe (RBZ).

From the local bourse being suspended from trading to the freezing of accounts coupled with arrests, the parallel market has seen disruptions to business as usual that have temporarily made ZW$ scarce or harder to deploy.

For several weeks after these interventions, the ZW$ has strengthened and appeared to stabilise. But alas, the discipline to refrain from wanton printing and thereby recklessly increasing money supply for any meaningful amount of time has eluded  Government .

The historical record shows material depreciation of the ZW$ over periods of 3 months, with no exception for the periods over 6 months.

Is this time different?   The answer, sadly, is a hard no. There is an axiom about reputation: it’s built-in drops, lost in buckets. It is a long hard road to build faith and confidence in the ZW$, one that would optimistically take a few years, perhaps decades.

Furthermore, one can only start counting progress once the nature of the problem has been assessed honestly and a decision to tackle it seriously has been made and its execution has begun.

Unfortunately, both Treasury and the central bank are in denial about the root causes of hyperinflation and the corollary runaway debasement of the ZW$.

As far as they are concerned, notwithstanding their commendable fiscal and monetary discipline, there are economic saboteurs that are able to successfully undermine the local currency.

Apparently, the sophistication of these bad actors is such that since they started their anti-ZW$ campaign, Government with all its investigative and prosecutorial powers, has failed miserably to identify and convict any of them for breaking the law.

Sometimes, the wrong diagnosis can lead to a treatment regime that is surprisingly effective. In this case, Zimbabweans are not that lucky. Gold coins are not going to reduce demand for US$ on the parallel market.

The nature of the parallel market is that it is off limits to institutions subject to tight regulations that translate to constant oversight and auditing.  The prescribed assets and liquid asset status options previously available for their portfolios were value furnaces once adjusted for inflation.

Therefore, they are delighted to have an opportunity to legally purchase a non-monetary asset that checks important statutory boxes and is guaranteed not to self-immolate in real terms.

Their demand for gold coins has no impact on the parallel market, which they did not participate in. Buyers of US$ on the parallel market do not have the handicap of the formal financial services players. The risk of having their accounts frozen or being arrested are par for the course for them.

Its priced in. The downside risk of sitting on ZW$ bank balances that are material to them — losing their purchasing power almost daily, is considered high enough to warrant legally aberrant behaviour.

To paraphrase the French judge and political philosopher Montesquieu: “Bad laws make good people criminals.”

Zimbabwe’s exchange control regime is the epitome of this idea and US$ notes are a well-understood respite from the ever-depreciating ZW$. Will the man on the street, very much alive to the propensity of their ZW$ bank balances to be molested by inflation, choose to buy gold coins instead of US$.

Certainly not.

Not because, in their infinite wisdom, the central bank has so far issued coins with a US$ value north of the average Zimbabwean’s annual income, but because of the poor standing of the issuer.

The  Government is the issuer of the ZW$, and in this capacity has made many well-documented commitments and promises that they have consistently failed to honour. There is a dearth of good reasons, for anyone who cares for historical evidence that is, to take  Government’s commitments and promises around the gold coin seriously.

At this point, if you are still reading, you may be rolling your eyes thinking the correction of the ZW$ on the parallel market has nothing to do with gold coins.

It’s obviously got everything to do with the directive to stop all payments to suppliers.

Point conceded and agreed.  Croatian Budimir Sobat holds the world record for holding your breath: he managed an impressive 24 minutes 37 seconds in March last year.

It would be folly for one to conclude that humans are well on their way to doing without air. Governments that don’t pay their bills don’t exist.

Zimbabwe is no exception. The notion that suspending payments to suppliers is a sustainable solution to the woes of the ZW$ is worse than wishful thinking. It’s delusional.

In my view, the diagnosis is off, and the treatment is impotent. This victory lap, like the many before it, from “Zvakarongeka”, to budget “surpluses” to successful “willing buyer willing seller” foreign currency solutions, will not age well. — This article was first published by Zanj Financial Network (Zfn)

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