The biggest single problem of treating dedollarisation as a process, taken a step at a time, is that at times events overtake the process and the fiscal and monetary authorities have to move forward and bring in measures that are in many ways reactions to events, although hopefully part of the general master plan.
The advantage to going this route are also large. Steps can be tailored to fit reality, instead of having something copied from a text book or a report of a theoretical economist. And, since so many are nervous of change, worried about change and even panic over change, the reaction-led process at least shows everyone that change is necessary and the results of that change cannot be a as bad as doing nothing.
We have seen this again over the last week. The black market started going bananas, almost certainly triggered by a holder of a large sum of Zimbabwe dollars in their bank accounts wanting to switch this to US dollars for any of a number of purposes. The general excuse is “I want to maintain value”, but the real reasons can include a desire to move capital out of the country, to forward buy raw materials or even just to have US dollar cash to buy petrol.
The result, of a significant increase in buying pressure, means that with the limited amount of diaspora money on the streets the price of such US dollars will rise. Inward flows of free funds are remarkably regular. The market fluctuations and distortions are caused by the quantity of Zimbabwe dollars sloshing around in bank accounts, and since the Reserve Bank of Zimbabwe reckons just 200 account holders control half the money supply it is fairly easy to see where pressures can come from.
The next problem, as the black-market street rate starts rising, is that others who would normally sit back during such a change now panic. If others are doing it they must do it too. What perhaps many buyers of black market US dollars do not really think about is who is selling, and why do they think selling is a good idea. Sellers tend to be more dispersed than buyers, or rather there do not appear to be the same large account holders at the centre of the selling side as there on the buying side.
Some sellers need local currency for local bills. Some are out to make a profit, having brought US dollars a while ago and now want to cash in. For many products it is actually a lot cheaper to use Zimbabwe dollars, starting with fuel where local currency fuel prices are roughly half what the same fuel costs when bought with black-market dollars, partly a result of the gap between official and unofficial rates and partly because Government charges higher duties on forex fuel.
With this new environment, the Government has started implementing plans that have been announced already. And, in one interesting move, has assembled what it calls a “task force” headed by the Finance and Economic Development Ministry with the Reserve Bank of Zimbabwe, members of the Monetary Policy Committee and the Presidential Advisory Group. This formalises what is largely the existing case but has the advantage that wider consultation is more likely to uncover deficiencies and more likely to bring those directly responsible for fixing economic matters to sing from the same hymn sheet.
Legally there are differences in functions and independence between the fiscal and monetary authorities, and those have to be respected. But there is nothing wrong with everyone hammering out the same set of policies that require action from both. And if the Finance Ministry is the leader, this makes sense.
That largest single reason why Zimbabwe needs a revolutionary programme to fix things is because the Finance Ministry of the First Republic was exceptionally irresponsible and so the Ministry has to take the leading role in Second Republic of returning Government to realistic spending and imposing the required discipline. The rest of the team have their work cut out, but this is largely shovelling up the mess inherited from the first 37 years of independence and backing the new realistic approach.
The first set of policies brought to the front are the long-expected upgrade of the interbank market. It has not worked as well as hoped and has taken time to become accepted. But it has already moved a lot of the foreign exchange allocation system from fiats by the Reserve Bank or market orientated policies.
Now it will become more of a full-fledged market. Technical upgrades mean that the electronic system will be in place, allowing banks to move more swiftly. Secondly the Reserve Bank will be moving just about everything to do with foreign exchange into the market.
The RBZ has already moved from allocations to using the interbank market to set the exchange rates used when it makes a block allocation. Now it will be moving more into the normal world where it will manage the announced float of the Zimbabwe dollar, intervening in the market but not sidestepping the market.
The second set of policies involve controlling that money supply largely inherited from the First Republic. The gross economic inequality in Zimbabwe means that there are those 200 account holders with half the deposits, and a few hundred more who control a lot of the rest. The task force will be moving to lock-up some of this liquidity sloshing around, with Finance Minister Prof Mthuli Ncube suggesting vehicles like corporate bonds.
This will obviously help, but care is needed that the offered incentives will not be just as damaging as doing nothing. Negotiations will be needed. The authorities do have some pressure they can bring to bear. Even with a constitution that stresses property rights, a Government with a majority in Parliament has powers to enforce compulsory actions in the fiscal sphere. Obviously it would be far better if voluntary, market-related methods could be generated that mop up excess liquidity, but everyone should remember that unreasonable behaviour can be overcome.
The Government is also stressing its determination to adhere to a positive primary budget surplus. As we have said before high quality monthly statistics will help continually building the trust that this Government treats the matter is as close to holy writ as a Government can go.
At the same time, experience has shown the Government, and everyone else, that when major payments enter the system they can be a source of the large blocks of funds used to enter the black market. Minister Ncube now plans to spread his block payments, instead of paying a large bill instantly and in full when the tax collectors send him the cash. This is an administrative detail, but one driven by experience, not by text book.
The third thrust was the Minister’s recognition that being pleasant and diplomatic about the black market has had zero effect on lessening its attitudes. It may fade away, but not tomorrow, and he is right that some stick is now needed to back up other changes. Bureaux de change are to be given extra rights, which should allow legal and overseen businesses assume all the needs that the black market now fills.
What is now left is to slash and then kill that black market. Laws exist, but need to be enforced. Running after street traders is not going to solve the problem. It is known that a small number of people largely control this market and it is known, because the RBZ can read bank accounts, that some otherwise respectable concerns and people are buying and selling in that market.
The authorities need to go after the big near anonymous controllers of that market and lean very heavily indeed on the big concerns that use that market.
The package announced this week, of a better official market, serious efforts to mop up liquidity, having better legal bureaux fulfilling the reasonable functions of the black market and going after the black market itself add up to a large step on the road.
We all need to remember that markets may well be a little jumpy as the programme comes into operation since the authorities do not have that large pool of foreign currency that most countries can borrow from the International Monetary Fund to help run the transition reform process smoothly. But the actual reforms are the sought that the IMF and many others have been urging Zimbabwe to take for decades.