eBusiness Weekly
Fairly obviously the measures taken in the middle of last year to stabilise the Zimbabwe dollar, or at least make its depreciation a slow process, are not working as well as everyone hoped for all sorts of reasons, some of them having absolutely nothing to do with the actual potential value of the local currency.
It is obvious that the longest lasting effect of the emergency dollarisation in 2008, which followed the currency printing spate of the Reserve Bank of Zimbabwe over several years, is the total district of the local currency and the desire to have cash held as foreign currency, preferably the US dollar.
This was a survival tactic in the last days of the old Zimbabwe dollar, but became the new normal for most businesses and a lot of private individuals.
We are still living with the damage. Dollarisation not only wrecked a lot of the local economy, especially in the industrial sector which had become over-reliant on import substitution even when this made little economic sense, but created a new psychological mindset that made the US dollar king.
In some ways the continued legal existence of the multi-currency regime was forced on the authorities and the country at the beginning of the Second Republic when it became obvious that the wheels had come off the dollarisation process.
But it does not make the job of creating a proper local currency any easier, and in some ways makes it impossible.
The Eddie Cross solution of a “big bang” and the instant return to a proper local currency with all transactions in that currency, and all export earnings and other foreign currency payments converted to local currency on being receipted in Zimbabwe, is tempting.
This was the system in force right from the time the Rhodesian pound lost its link with sterling at UDI until well into the hyperinflation era of the 2000s when the decision was made to allow exporters to retain a small percentage of their export earnings as an incentive, and to allow those receiving diaspora remittances to have these paid in US dollars.
The circumstances of the time also saw the ballooning of the informal sector, and its movement into a pure US dollar sub-economy.
But obviously the present system needs to be upgraded, so we can move towards this normal situation where the local currency is the working currency.
President Mnangagwa in his remarks before the first Cabinet meeting of the year this week started the ball rolling.
For a start he wants a functional fiscal policy, which he largely has and has had since the beginning of the Second Republic, a policy that insists all recurrent expenditure and a large block of the capital budget comes out of ordinary Government income, basically the tax receipts.
A little capital spending can be from borrowed funds, but only when there is a clear revenue stream that allows instant servicing of that debt, without waiting for the upgrade in the economy to provide more future tax income.
He also wants a clear monetary policy. While significant work has been done, including removing anything that can remotely be described as quasi-fiscal operations being removed from the Reserve Bank of Zimbabwe, and including those operations that in many countries are part of a central bank’s ambit, we clearly need more work in this area because of our unique circumstances, including the mindset of the population.
So he announced that a “structured local currency” was being set up. There were no details, but several paths now potentially exist. For a start Zimbabwe has been creating reserves, for the first time since UDI.
Besides the holdings in foreign currency by the authorities, which are not immense considering the 70 percent retentions that exporters are permitted, we have the growing stocks of minerals, with half the royalties that miners have to pay being now in kind, held as bars of metal or stocks of lithium salts.
So it is now possible to peg money supply to something tangible, minerals as well as foreign currency, and to allow the money supply to grow but only in line with the growth of reserves.
That avoids the recession that can be triggered by having a totally stable money supply, but also means that increases in supply cannot be just rewriting a number in a database.
It could also be possible to expand the royalty system to include agriculture. Almost all farming land is now State-owned, just as all mineral rights are State-owned, so it is possible to raise a farm royalty of say 1 percent of sales, excluding the crops kept for on-farm consumption.
Admittedly crops are more perishable than bars of metal, but for start we need to build strategic reserves of grains and oil seeds, at least a six-month supply after the annual recurrent sales are finalised, to cope with climate change, and the royalty on major export crops of tobacco and cotton can be stored as foreign currency.
It could also be possible to use that farm royalty to fund some of the huge infrastructure needed to grow agriculture, ring fencing the receipts for the dams, irrigation development, boreholes and roads that farmers need.
Combining this and the need for reserves is easier than it looks, as even the very modest capital borrowing would be cut.
The development of fiscal and monetary policy to include the whole informal sector can be accelerated, especially with modern technology.
Already the 2024 national budget has made a major inroad into the process, basically bringing in all the small shops, who now have to be tax registered and compliant to get supplies, and a chunk of the informal service sector, those with premises at least.
The tobacco farmers, and this means all tobacco farmers even if they grow just 0,5ha, have had to registered and licensed since the switch-over to contract farming.
To a large extent the rest of the small-scale sector is now included, with the Pfumvudza/Intwasa programme and the related livestock programmes now listing the farmers who benefit. Databases may need to be more extensive and carry more detail, as is already the case with tobacco, but the basis is now in place.
This still leaves a chunk of the informal sector where no one has the faintest idea of who is involved or even how many are involved, but again the central Government is keen on a licensing structure run by local authorities, say hawkers licences for the mini traders and something similar for those very convenient providers of services.
The fees can be tiny, because the main gain would be having everyone involved in business listed on a database and as even the tiniest business grows the tax authorities can start monitoring and step in on the day when incomes rise into the lowest tax brackets. Controls will be easier if everyone has a licence certificate.
The practical effects might be almost unnoticeable to start with, since the mini businesses are well within the zero tax rates and fall below the VAT thresholds, but once everyone is in a database progress can be monitored and for the first time those overseeing the economy and economic expansion would know who was adding value in that economy, where they lived and what they were doing.
Already Pfumvudza/Intwasa is telling economic policy makers what is happening in the farm world but over half the economically active urban population are simply a large group of unknowns.
Keeping the records was impossible in the past, and the administrative costs would far exceed any income that could be derived so they would be a deadweight in the licensing and tax system.
But modern technologies mean that it is just as easy to list the myriads of the smallest businesses as the far smaller numbers of the biggest with almost zero extra administrative costs.
The system could also take a leaf out of the Pfumvudza/Intwasa programme and insist that simple records were kept.
These need not involve the complex books required by a large or even a smallish business, and could just list daily takings and daily expenditure, using a cheap exercise book, but it would be a start.
ZimStat would still have to do their surveys to try and figure out just how big our economy is and how it is growing, but as time marches more and more continuous hard data would be available.
The access to those potential loan funds through the Empowerment Bank and the Women’s Bank could be made reliant on having records that make sense, so giving some incentive to the smallest traders and service providers to keep records. Literacy levels are now so high that basic universal records are a practical possibility.
Decent data would also allow the acceleration of the policies of sorting out the local currency since it would be possible to estimate the sort of money supply actually needed within the economy, and thus the sort of reserves that would be needed to back that currency.
Fiscal authorities would be keen to know just how much tax is not being paid, and more importantly what future tax returns would be possible.
