Reserve Bank needs to be very open

The killing off of the old Zimbabwe dollar and the introduction of the ZiG a week ago by new Reserve Bank of Zimbabwe Governor Dr John Mushayavanhu has raised a lot of expectations and generated a lot of support, but now Dr Mushayavanhu and the new currency are going to have to deliver.

The initial conditions are good. The Government has had strong fiscal discipline for more than five years, and has closed the loopholes of overpricing and other horrors. The Reserve Bank has been pulled out of its quasi-fiscal operations, and it is not the job of a central bank to fund a government despite that heresy embedded at the beginning of central banking when a bunch of rich merchants were allowed to set up the Bank of England. Times have changed and only the US Government as the owner of the US dollar printing presses can continue to expect the Federal Reserve to fund its deficit.

Dr Mushayavanhu, who as a banker has seen the effects of that heresy and the quasi-fiscal operations for most of his career, must understand this in his bones and so is believable when he states he will refuse to do this. Already almost everything vaguely fiscal is now in the hands of the Ministry of Finance. Economic Development and Investment Promotion, where public accounts give a high element of transparency, rather than being buried in dark corners of the Reserve Bank tower.

The ZiG is based, at launch anyway, on the price of gold and the launch announcement did include the crucial information that the value of ZiGs in circulation was just below the foreign currency reserves and less than half the growing gold reserves, created out of that sensible decision to allot half of all mineral royalties to the reserves.

It would seem exceptionally sensible, as part of measures to build up trust, for the Reserve Bank to issue timeous monthly statements of ZiGs in circulation, and the reserves of foreign currency and gold. A huge margin seems to be required. The statements could even be weekly to build confidence faster. And the Reserve Bank needs to be far more transparent and far more willing to give explanations, preferably before the economic observers climb in.

A surprising amount of the perception problem arises from under information, with Zimbabweans tending to assume that somewhere along the line the authorities will not maintain the line they are now taking. That, unfortunately, comes from too many years of promises and attempts to bolster confidence in the past. So it would be better to switch to over-information, and make sure Zimbabweans know the precise state of national accounts at all times.

That said, there remain a pair of problems most countries do not suffer, a multi-currency regime and a black market that is treated as the voice of God rather than as a small convenience operation for people wanting to change money quickly out of hours or in out of the way places.

Zimbabwe is an abnormal state, using for all practical purposes two currencies, although it is labelled as multi-currency. So the ZiG will circulate alongside the US dollar. And at the moment of changeover in the local currency, about 80 percent of transactions, again according to the Reserve Bank, are in US dollars so what was becoming an unofficial process of dollarisation is far advanced, especially when the remaining transactions in the old Zimbabwe dollar were almost always calculated in US dollars and just converted into local currency at the moment of payment.

This is not healthy and needs to change, although as both fiscal and monetary authorities note this will not be instant. But it does leave Zimbabweans hanging in the air, and there is that exceptional desire to maintain holdings of US dollars and to receive payment in US dollars. While the more thoughtful might recognise that dollarisation would destroy swathes of the industrial economy, and cause major liquidity problems, as individuals they feel they benefit so long as everyone else uses local currency. It can be analysed as a tragedy of the commons, even though it not that, but the effects are largely the same with individual selfish goals wrecking the whole system.

A reasonably stable currency will be a major start, but this needs to be prolonged. We have been through multiple reforms. For the first six months to nine months the Zimbabwe dollar exhibited stability, then crashed again. We cannot keep having these annual crashes, driven by a wide range of factors but quite often just because the black market, the parallel market, needed more money and people were prepared to manipulate, and others had lost confidence. There was rarely a single reason but once a crash started everyone joined in.

The problem of the growing informal and unwanted dollarisation is recognised. For a start half of all taxes will need to be paid in ZiGs, which will start moving the percentages down from 80 percent US dollars as businesses need to accumulate ZiGs but more action will be needed. Some serious targeting, for perhaps 50 percent ZiG use in transactions within a specified timeframe would be useful, along with how the backing works.

And a lot more explanations will be needed. Already the great feeling of hopeful change within the general community is tempered by the realisation that ZiGs will not buy fuel for the time being. Now there is a perfectly good and rational explanation of why the fuel sector has been a sacred cow operating entirely in US dollars.

Zimbabwe imports more than it exports, so there is a negative balance of trade, not huge but there. At the same time there is a positive balance of payments, in other words more foreign currency comes into the country than goes out. The gap between export earnings and inward foreign currency flows is largely filled by the diaspora remittances, but there is a need to put these to use on a national scale.

The largest single import group is the petroleum fuels. Dollarising that sector did see major exporters buy their fuel with export earnings, but this particular set of buyers only make up a modest portion of the market. For the rest, directly or indirectly, they use diaspora money. It might go round in a lot of circles but eventually ends up in a service station. With the bulk of fuel not being paid for with export earnings, and so in effect coming out of the trade account, there is probably a surplus of exports over the rest of the imports, a de facto positive balance of trade.

The statistics could be made more precise and useful by splitting imports into petroleum imports and the rest, and noting that petroleum fuels are largely paid out of free funds, not export earnings. The two trading balances could then be given as well, so people understand there is that de facto positive balance on the trade account.

Unless someone has a better way of moving a lot more of the diaspora remittances into the formal economy, and obviously a fair amount are spent in formal retailers but not enough, we probably need to keep the weird fuel sector on dollars. But we should be looking hard for other solutions and restart that abandoned programme of having some flow of fuel sold for local currency.

The second major element of disquiet is what will the black market money traders be doing. The black market has never been a major market, and most traders deal in very small sums. So it tends to be ignored in national accounts. But it has a major influence on perceptions, and in particular the price black market dealers charge when they sell a US dollar. This is that voice of God.

Then people compare that sale price with the intermarket rate, which is the midrate of the weighted average between what the banks pay for US dollars and what they sell them for, so for a start the comparison is between apples and pears.

Secondly the black market deals in huge margins, like 25 to 35 percent between the bid and ask prices. Already a lot of people have noticed that what the pavement dealer pays for a US dollar, and what it buys in a shop, are very close and for many practical purposes those who insist on giving prominence to black market rates should be comparing what pavement dealers, shops and banks pay for US dollars. Banks still have a high margin, up to 10 percent, but the stability of the ZiG  should push that down towards the couple of percent that exists in most countries.

The black market exists because of its premium and there is obviously a lot of interest among dealers to maintain a high premium, regardless of fundamentals.

This problem is perception affects the interbank rate. Exporters selling foreign currency seem to think they are entitled to the black market selling price for a US dollar, even though the black market buying rate is so much lower and the black market deals in well under 10 percent of foreign currency. So there is continual pressure on banks to raise their price for what they pay for dollars to levels that do not match the fundamentals. We need to change perceptions, and get people to understand that the black market is not the voice of God, but the collective voice of greed.