Economy Uncensored with Tapiwanashe Mangwiro
We think of trust as precious, and yet it is the basis for almost everything we do as civilised people.
Trust is the reason we are willing to exchange our hard-earned paychecks for goods and services, pledge our lives to another person in marriage, cast a ballot for someone who will represent our interests.
We rely on laws and contracts as safety nets, but even they are ultimately built on trust in the institutions that enforce them.
We do not know that justice will be served if something goes wrong, but we have enough faith in the system that we are willing to make high-stakes deals with relative strangers.
So how do you build up stores of this foundational leadership capital? In my experience, trust has three core drivers: authenticity, logic and empathy.
People tend to trust you when they believe they are interacting with the real you (authenticity), when they have faith in your judgment and competence (logic), and when they feel that you care about them (empathy). When trust is lost, it can almost always be traced back to a breakdown in one of these three drivers.
You might be guessing why we are talking of trust issues, but early this month the Ministry of Finance and Economic Development and Investment Promotion went into the market.
The Treasury through the Reserve Bank of Zimbabwe (RBZ) has since invited Financial Institutions, Corporates and individuals to subscribe to the 90-day Foreign Currency Treasury Bills (TBs) Tender amounting to US$5 million.
TB’s are Government backed debt obligations floated in a bid to raise funds and are generally a global best practice due to their attribute of being a low risk and secure investment.
“Applications must be for a minimum US$50 000 for financial institutions and corporates and US$5 000 for individuals. Non- competitive bids for corporates and individuals through the banks.
“Maximum of two bids per Financial Institution. Copies of the Application Form are available from Banks and RBZ Local dealers,” the notice reads in part.
Treasury bills were a major source of government funding in the final year of hyperinflation which ended early in 2009, when the country abandoned its domestic currency and dollarised.
Inflation running at billions of percent annually ended almost overnight but given Zimbabwe’s bitter experience of reckless monetary expansion degenerating into hyperinflation before dollarisation it is no surprise that the bureaucracy should be so reluctant to tap the money market.
Commercial bank reluctance to lend to what in effect is a heavily indebted Government, is understandable, which is why the authorities need to accelerate negotiations for debt repayment.
The return of the money market is a small step forward not least because the Treasury bill rate sets a market-determined floor for interest rates.
In general, confidence and economic fundamentals are highly correlated.
If you look at the case of Zimbabwe, the reason confidence is low is relatively straightforward to explain.
Inflation is double digit, the economy is barely growing, if at all, the currency is not yet fully stable, and the gap between the official and parallel rate is growing.
Issues such as corruption or improving the business environment are being tackled, but only slowly.
So the lack of confidence mirrors the fact that strengthening economic fundamentals is still work in progress and not yet fully completed.
In addition, the historical context matters, confidence is something that is difficult to build, but easy to destroy.
Given the past two decades, it’s understandable that the Zimbabwean public and investors in general are more sceptical about Zimbabwe’s commitment to reform and stability, compared to peers.
Thus, the hurdle rate that the authorities must pass is going to be higher than in other countries and may take longer.
Having said that, a lot of progress has been achieved over the past 18 months and if this continues, this is bound to translate into stronger fundamentals and hence higher levels of confidence.
However, it is the lack of such confidence that will see the foreign currency TBs being shunned by citizens as they do not really look attractive.
There are three reasons why individuals acquire them as listed below but the cloud overhanging our monetary system will deprive them from a perfect stock market hedge.
Although the interest rate on treasury bills is very low, they are a good addition to the portfolio for some investors, as they quickly trigger an interest payment due to their short maturity and bring stability to a portfolio due to the low risk.
Treasury bills and bonds are particularly interesting for investors when the markets are in a phase of downturn and one would make losses with investments on the stock exchange.
Treasury bills are therefore very suitable for capital protection. Moreover, treasury bills can be purchased relatively cheaply, so that a large initial investment is not necessary.
Hence, the minister and his counterpart the RBZ governor need to concentrate on boosting confidence rather than introducing too many instruments that will be met with scepticism.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn