eBusiness Weekly
Clifford Shambare
We ended Part three by analysing the rather negative attitude of the private sector to government monetary policies.
For example, they have always alleged that the latter’s monetary expansionary policy is the major cause of inflation in this country.
But then, such reasoning presents us with its own set of questions.
For example, why does the same action not raise inflation in developed and emerging economies? In the latter economies they can pump any amount of money into the economy and still maintain a manageable state therein.
In order to throw more light on this matter, here is an excerpt from Anna Louise Jackson and Benjamin Curry in Quantitative Easing Explained: Forbes Advisor. “(…)Here is how the simple act of buying assets in the open markets changes the economy, mostly for the better. Fed buys assets.
New money enters the economy; liquidity in the financial system increases. Interest rates decline further. Investors change their asset allocations. Confidence in the economy grows”.
But as can be expected, this action still has the potential to cause negative fallouts in the systems concerned. Here the major risk is that of raising inflation. But that doesn’t always happen. For instance, in the USA, the initiator of this strategy in the most recent episode of economic meltdown between 2009 and 2015, a period when the Fed implemented it in response to the financial crisis, ‘inflation never materialised’.
Considered from a positive perspective, QE is a form of treatment that, like chemotherapy, carries its own risks.
Viewed from another angle, this is akin to the after-effects of a grafting operation. Such an operation could result in negative consequences, but in most cases, in the developed economies, the results have been found to be positive.
In order to throw more light into Zimbabwe’s inflation challenge still, we need to reconsider the aspect of economic structure.
In doing so, we find that the latter is quite critical to the development, durability and/or sustainability of an economic system. So an economy with all the stages — that is, the primary, secondary and tertiary stage — is well equipped to withstand most vagaries inflicted on it by man and nature.
For example, in the current era where we all face the effects of climate change, developed economies are much more resilient than the rest because they possess most of the attributes to achieve such a state. The same applies to the phenomenon of inflation — a phenomenon that is dreaded the world over.
Here we find that an economy where (all) the components — that is land, labour and capital — as well as technology and skills, are in place — the strategy of QE is able to spur economic growth.
Above is a graph showing the FED’s balance sheet growth as a result of QE.
In an article titled; “Why didn’t QE lead to hyperinflation?” Adam Boyle and Michael Rathburn give the following explanation; “When financial institutions collapse and there is a degree of uncertainty, people and businesses choose to hoard their money rather than risk investment and potential loss. When money is hoarded it is not spent and therefore producers are forced to lower prices’. In the USA this action was supposed to lead to a condition of deflation but in that case, it didn’t.
Why?
The answer to this question comes from the following explanation by the authors’; “(…)The banks and financial institutions hoarded the money in order to shore up their own balance sheets and regain profitability. “(…) Banks still had bad loans and toxic assets on their balance sheets as a result of the housing bubble burst and its aftershocks.
The extra cash on hand made their financial picture a whole lot better. As the economy recovered and the Fed began tapering its interventions, the money being held by the banks returned to the fed slowly in the form of interest payments on the debts purchased during QE. Meanwhile the US economy remained productive and growing”.
The final statement here sums up everything, so in this case, you do not have to be a banker to appreciate the fact that production is the key aspect here.
So at this stage of our discourse, we have come to the realisation that production is the cure for runaway inflation. However, in this country such is not the case. In fact, here QE will do the opposite since — in this case — its implementation will only result in a state of inflation but without the expected economic growth.
In such a scenario, the result of implementing QE would be an economy that is literally ‘bloated’ by too much money. Ultimately, this state of affairs, in itself, constitutes a dilemma for the economy as a whole. Such a dilemma stems from the need to raise money supply while keeping inflation stable and manageable. The first objective of the strategy is necessary if the economy is to continue growing.
What is fascinating, though sad here, however, is the fear often expressed by our economists — that is one of raising money supply.
This is a condition that is emanating from the fear of the negative effects of [a too fast] money supply growth. This is a fear that has been built into their psyche over the years due to (their) bad experience(s). This fear — a fear that, on the other hand, one can only regard as logical, goes back to our economy. This is an economy that is too unsophisticated to absorb too much money.
The way I see the matter, in order to cure it, this kind of situation needs cooperation from the authorities and the private sector first.
In this case, if government had the funds, this is where subsidies would be appropriate for bailing out companies that are being negatively affected by the losses being caused by this inflation. Here, tax breaks, that will definitely result in the reduction of taxes — one of the biggest sources of government revenues — would not be amiss.
But then, government is currently not getting enough tax revenues from the same companies to implement such a strategy. This is the source of another form of dilemma since awarding tax breaks to companies will tend to render the government poor.
On the other hand, if this strategy were to be adopted under the current conditions, it would then become a question of priorities. In that case, the question would be; which companies would be selected for assistance?
But whatever the case may be, this is a situation that calls for a long term approach. But then, in the meantime, how will the economy and the people be surviving? This is where an injection of cheap credit from outside would be handy. But how far can one go with such a strategy, is the question?
At this juncture, let us continue to relook into Zimbabwe’s inflation challenges. I have taken this route because I feel that our case is unique, and as a result, it (appears to) defy conventionality. Here we have among us, phenomena such as opportunism, corruption and the politics of regime change. The latter is usually intertwined with conspiracy theories.
So far, we have considered the impact of corruption and the regime change strategy on inflation. Now let us bring in opportunism, in the process considering it together with corruption. If we do that, we find that the two are also intertwined. But while opportunism is an urge that is closely connected to habit — one that normally works through impulse — corruption is a contemplated and deliberate act which results in, or (is) a form of theft. And we know that habits take time to cure. This implies that the latter — that is corruption — could be (paradoxically) easier to control than the former.
Corruption is a scourge that has now occupied a central position in the current unenviable position the Zimbabwean economy now finds itself.
Fortunately for us, this is a condition the authorities are not unaware of. As an illustration of this fact, thorough a press statement published through the Business Weekly issue of 11-17, November, 2022, they announced that they had identified and proceeded to blacklist 19 companies that are closely connected to government supply systems.
A close analysis of these companies reveals some rather alarming facts. To begin with, a close look into their history reveals the fact that most, if not all, of them are possibly indigenous owned. If that is the case, they are companies that were formed and registered in the past couple of decades or thereabouts. Furthermore, most, if not all, of them are into supply contracts — an [(and without experience in production.
Now, if we consider that huge sums of money — in fact millions, if not billions — of dollars, are involved in these contracts, then we can easily see why the manufacturing and/or productive industries, that are supposed to be the major beneficiary from such funds in a young and (supposedly) growing economy such as ours — are suffering from lack of working capital in this country.
By the same token, we can also see why the rate of inflation — that is usually a consequence of heightened levels of importation — itself, a practice that works against one of import substitution — has now reached untenable levels in this country. To my mind, without a reversal of this trend, there is no way we can tame this malady.
In this case, are you aware that reducing corruption — even by a limited margin — will automatically avail us with funds to ameliorate our economic challenges?
Then there is the matter of regime change in Zimbabwe. This is an area loaded with conspiracy theories. And a conspiracy theory is defined as: ‘A belief that some covert but influential organisation is responsible for an unexplained event’. Perhaps because it is based in a realm that dwells in the non material world — the spiritual world — this is a phenomenon that most of us often dismiss, in the same vein associating it with rumour mongering and superstition.
But according to one article in the Economist, conspiracy theories often come true. Such an assertion — one that is supposed to be based on research and experience, strengthens my case here.
Here are my reasons for taking this stance. First of all, there is the case of a multicurrency regime in the country in which the US$ dollar is the dominant one. This regime came about during the time of the Government of National Unity — a period during which Tendai Biti, a member of the opposition party, the MDC, was minister of finance. At that time — a time that Biti himself often boasts of having managed — the economy seemed to work well and to grow.
Perhaps as a result of that development, in the current period, there is a section of the Zimbabwean community that would want the US dollar to be declared the official currency of the country.
As can be expected, quite a substantial proportion of the latter — most of them with a leftwing political leaning — would want out with the Zimbabwe dollar. Evidence of this assertion is compelling. ZDERA is the first and foremost evidence. Then there is the Newsday — a left leaning publication — whose price has been pegged at $ZW1000 but whose foreign currency equivalent price is 1US$. Furthermore, some time at the beginning of this year (2022) Newsday predicted that by the end of September in the same year ‘the Zimbabwe dollar will be gone’.
When considered from such a perspective, this is a case that is loaded with intrigue that borders on fascination. On the one hand, the ordinary man in the street sincerely believes — and has actually experienced — the purchasing power of the US dollar — no doubt about that. So in a way, this thinking and consequent behaviour, is normal.
But then, in the process, he compares the US dollar with the local currency and finds the latter to be ‘trash’ and so he ends up loathing his currency. This is tantamount to self-hate — a negative characteristic now quite common among Zimbabweans.
Sadly, all these attitudes end up, to a certain extent, being a self-inflicted phenomenon. So the implication here, is that if a change of attitude could be somehow brought about among the populace, it is the one that could likely lead to a solution of our currency and inflation related challenges here.
Considered from an informed perspective, this thinking and consequent behaviour, has far reaching and negative consequences on the Zimbabwean nation and economy.
On the other hand, the government is aware of the weaknesses emanating from a strategy of running an economy with a foreign currency, these being scarcity and its attendant loss of value of the local currency. Loss of control of the capacity to manage money supply is another. Then there is a constrained economic growth.
Shambare is an agriculture economist based in Chinhoyi and is reachable on 0714045435
