eBusiness Weekly
Clifford Shambare
On 9, May 2022, I happened to watch a programme where Tendai Munengwa of ZBC was interviewing the Reserve Bank of Zimbabwe Governor, Dr John Mangudya, on the matter of inflation and exchange rate challenges the country is currently going through.
As the interview progressed I became quite concerned about how it went since in the process, the interviewee seemed to be trying to skirt around the issues the interviewer was trying to get at.
Be that as it may have been, from that interview, I picked fife issues; the first one was the relationship between the RBZ and the lower tier banks; the second was about fuel importers—the way they are managing the process of fuel procurement. The third one was about price rises that are currently dogging the economy. The fourth one was about the production or productivity of our industries as they relate to the growth of the economy.
The fifth, but not the least important, is the case of foreign currency—specifically, the US dollar, as it is currently impacting on the Zimbabwean economy.
All these are not new issues. Interestingly, but sadly, many of us—those who are in the know—are always making direct and oblique references to these matters but do not seem to be making an effort to contribute meaningful solutions to same.
The way I see the matter, our challenges arise from the weaknesses that are now endemic and almost [proving to be] inherent within our economy. Here are the main ones:
Firstly, our economy is not productive enough to stem its current downward trend despite claims to the contrary.
But then at this point, you may be asking yourself why I am making a claim that appears to be contrary to the available statistics that are claiming an economic growth rate of 7 percent; and this against a World Bank estimate of 3.5 percent. The answer here is surprisingly, relatively simple.
As far as the differences between the two estimates are concerned, if we look back into history, we find that the Bank’s estimates have always been conservative. This seems to stem from the culture of this bank. The other reason is one of caution; both being cultures that it shares with all banks the world over.
But whatever the case may be—interestingly—history has nearly always vindicated this bank.
On the other hand, there are [some] reasons why the local estimate is nearly always exaggerated. One of them is the fear of a worst case [scenario] developing in the economy. The other is one of trying to create positive impressions on the Zimbabwean public for reasons best known to those involved in this work.
So in order to make good sense of these estimates, we need to look at them in their proper context. In such circumstances, it becomes logical to consider this growth rate against other critical economic growth variables. The first to come to mind here is interest rates and inflation.
These two are related in a rather complex manner. The interesting part of this matter though, is the interface that exists between the lender (the investor, through the investment banks) and the borrower—that is established, the potential investor or budding entrepreneur.
In order for the whole system to survive and to prosper, these three parties—that is the RBZ, the investor and the entrepreneur—must continue to function; this despite their apparent conflicting interests.
Sadly, in this respect, one can already detect the attitude of the private sector, some of whose members are already averring threats veiled to stop giving credit to potential borrowers and debtors.
This is a stance that the government is now trying to ameliorate by announcing that those producing strategic products will not be affected by the current borrowing embargo by the RBZ. Whether it will work is anybody’s guess.
As regards interest rates, when considered from the perspective of the investor, they should be as high as possible.
But then, if the interest rates are too high they discourage business startups and if too low, they discourage investment, hence the need for balance here.
Sadly, our economists never seem to approach this issue in a balanced manner whenever it confronts them.
So, if and when, we consider this matter holistically, we find that in a healthy economy, interest rates should be higher than inflation to enable the investor to realise a positive return on his investment.
But then, for investment returns to be profitable, there has to be a viable economic system in the first place. And the most critical element in viable economies is production. This is particularly so in a developing economy such as ours.
Now, let us look into the matter of fuel—a critical input for the economy.
Together with electricity—another energy source—these two make up a primary component of strategic inputs for the country.
Because of this critical status, the importation of fuel should have been kept under government control. So it is not an exaggeration to assert that the latter made a serious mistake by privatising this function. The current case between NATO and Russia, in which energy has now become central, attests to this assertion.
However, this is not a simple case since this decision was made during the days of the Government of National Unity—a rather dysfunctional coalition between ZANU-PF and the MDC, in 2008. When coupled with the capital flight that took place then, this situation created a serious conundrum for the economy.
But then, almost ten years later, the government made things worse by leaving the trading of energy in private hands. Furthermore, it left them to do this in foreign currency. So now, fuel procurement by the consumer has become the source of most of our economic challenges since everyone who has a motor vehicle now needs the US dollar on a daily basis.
At 1 700 000 motor vehicles in the country and assume a usage rate of 10 litres per day, we arrive at a figure of over US$17 million litres of fuel per day and US$10.8 billion litres per annum. This costs about US$30 million per day and at the current price of US$1.7 per litre, the total annual cost is US$18.36 billion.
In order to appreciate the criticality of energy for us, read; Sanctions Double Cross Oil to Rhodesia by Jorge Jardim; Abe Books). 0
Be that as it may, incidentally, as I was about to post this article at 18.00 hrs. On Tuesday 17, May 2022, I was pleased to hear the announcement made by the Minister of Information Monica Mutsvangwa, that the government has moved in to intervene in the procurement of fuel. This as it should be.
As far as foreign currency is concerned—apart from fuel—we know that this item is required throughout the economy for the importation of all sorts of items—that is, from machinery, to raw materials, and other finished products, to consumables, some of which are competing with local products. And as if this were not enough, even people in rural areas now prefer the US dollar to the local currency, for trading purposes.
But then, this is what is referred to as a ‘free market’ economy—a system that resonates with the concept of democracy.
So far, Zimbabweans have been bitten by both the democracy and the ‘free market’ bugs. The major reason for this state of affairs is our unbridled desire for foreign direct investment—commonly referred to as FDI. In the process, we have liberalised every aspect of the economy.
But when you are under economic sanctions as we are, there is no way you can survive without some discipline among yourselves and your systems. But discipline implies self-control.
As far as this matter is concerned, while considering the matter of democracy, Lee Kuan Yew, the former president of Singapore, once remarked that; ‘In economic development matters, discipline is more important than democracy’. He most probably said this in order to defend his affiliation for dictatorial tendencies. Nevertheless, he ran that economy very well, no doubt about that!
But do not get me wrong here, lest you accuse me of promoting undemocratic tendencies among the populace.
However, from this result, we can easily appreciate that democracy without controls will not produce the desired results on the economic front. In fact, the opposite is true here.
In the developed world, they have developed the art of implementing controls without appearing to interfere with democracy—a practice that in other contexts, is referred to as good governance.
This is the kind of art that takes time to accomplish. Moreover, in those environs there is subtle tolerance that is always at play amongst the opposing forces therein.
These are the kind of forces that may sometimes assume a political hue. And America is one such a country—a country whose economic system runs quite well even with the occasional tussle between the Republicans and the Democrats.
On the other hand, the endemic corruption in the Zimbabwean economy does not augur well for a disciplined system-a system in which the said good governance should be the pillar.
In this case, we often hear the private sector blaming the government for bad governance but they themselves, cannot deny the existence of the same practices in their own [operational] environment with a straight face. So as I have always asserted, in order to deal effectively with our challenges, government and the private sector need to work closely together. There is no alternative here.
And while at this point, it becomes critical to point out that the Central Bank is the link between the two—that is the government and the private sector.
And banks below the Central Bank are part of the private sector. While their function is multifold, the most important of these functions is as custodians of people’s monies; as facilitators of trade and commerce, as managers of investment and financial transactions.
Looking closely into this aspect, one finds that some of these functions are passive while others require continual activity on the part of investors. That of keeping people’s money is passive while the others are active. The passive attitude happens because most people who bank their money do not follow up on how banks use it. This investor attitude imparts considerable power to the banks by default.
When banks loan money they are said to create money in the process increasing money supply.
In this country banks currently seem to prefer to only lend money to potential investors in the form of overdrafts whose interest rates are so high as to be incompatible with long term lending.
The reasons for this attitude are not clear on superficial observation. But politics cannot be ruled out here.
This attitude is the reason why investors in this country are always crying for ‘patient capital’.
In the past the RBZ seems to have acquiesced to this practice but on the 9th May, 2022, following the instruction from President Emmerson Mnangagwa, John Mangundya, the RBZ governor, announced that the government has now stopped banks from lending since this practice raises money supply.
When it comes to this matter, the private sector has always blamed the government for this problem, alleging that the latter is the culprit when it sells bonds. It goes on to allege that this is the reason for the runaway inflation in the country.
But in my article on inflation a few years ago, I argued that this is not the major reason for our economic challenges. I still think that, although the negative effects of money supply on the economy cannot be completely ruled out, our main challenges may [very likely] lie outside the monetary policy realm. I believe they have more to do with lack of discipline and corruption among us, than the other reasons.
You see, when corruption enters a system, a lot of things can go wrong. To begin with, most rules are broken. If we consider our case here we, find that if ever the government tries to reassign the role of fuel acquisition to itself, the people involved will try by all means to beat the system using ironically, those who are in charge.
These are conditions that cripple the economy. But then, aren’t there enough brains out there to beat these saboteurs? I think there are; it just needs enough political will to beat the former’s wayward ways!
Shambare is and agriculturist cum economist – and is found on 0713971083
