Speculative liquidity drying up fast

13 May, 2022 - 00:05 0 Views
Speculative liquidity drying up fast

eBusiness Weekly

The weekend measures announced by President Mnangagwa, after he fairly obviously put his economic team under a lot of pressure to come up with something that would work to slow inflation and start providing more permanent solutions, should work.

There was no magic bullet, and probably never will be, but a wide range of measures were put in place, some probably temporarily, with the bulk there to hammer down hard on speculation and make a large swathe of speculative behaviour far harder.

The measures were also designed to rein in the private sector, especially the private banking sector, and force this growing and very large section on the economy to behave a lot more responsibly.

The Government itself in 2018 imposed its own discipline on State finances, with the biggest breakthrough being taking the Budget seriously and then working within something very close to a balanced budget.

At the same time monetary policy had to move from pious promises to something that made sense and would drastically reduce growth in money supply.

That was admittedly a consequence of the fiscal discipline.

If the Government lived off taxes then a lot of the exceptionally dubious measures used to fund undisciplined State spending would no longer be needed, and could be dropped and banned.

Having cleared the decks with the fundamentals that allowed the reintroduction of the local currency, and then the accelerated moves to bring in the Reserve Bank auctions in what could be considered a highly managed float, over managed as it turned out but that was fixed this year.

There were continuous adjustments, and some openings, but generally the graphs were all moving in the right direction although not as fast as desired.

Then came the mess we have seen since February of the black market exchange rates going bananas, without the underlying disaster in the fundamentals that would cause that.

One major problem was the growth in money supply, the amount of local currency, sloshing around in the banking system.

The Government had turned off its taps, but that still left the taps controlled by the banks and the speculators who appeared to be unwilling to turn the taps anti-clockwise.

In fact, they were fuelling the growth and most of that growth was going into ever more speculation, some legal and some, via the black market, illegal.

It has been known for some time that commercial banks were lending for speculation.

Of course those getting loans were not writing on their applications that they were borrowing to play the black market or play the stock exchange, and even those who were borrowing to climb legally into the auctions “to build up stocks” might have simply just said they needed to buy raw materials a bit early.

But bank managers, despite the excellent collateral they were demanding and the high interest rates they were charging, must have wondered just what their customers were doing with the cash.

But “know your customer” has limits and so long as there is collateral, so long as the interest is paid on time and so long as the loans are liquidated according to agreement, why should they go further.

All of that was drastically increasing money supply, hence the Monetary Policy Committee finally moving into the more old-fashioned measurement of M3, broad money, rather than just concentrating on reserve money supply.

And so the true horror started being revealed. M3 was racing ahead, and almost none of the growth had anything to do with the Government or the State sector.

So two measures were a double whammy to reduce liquidity drastically for speculation.

First bank loans are, at the moment, banned.

This must obviously be a temporary policy, at least at the nuclear level used.

Already wheat farmers whose loans are still being processed, although most now have their cash, have expressed concerns.

And there will be a growing amount of legitimate business that needs the normal overdraft and other loan facilities, even if this is just turning over and continuing what they already have.

And some individuals have been seeking mortgages or other longer term loans to buy building materials.

But the nuclear option at least creates the flat base.

Presumably bank executives are now hurriedly working out what they need to do with the Reserve Bank of Zimbabwe breathing heavily.

By slamming in the ban the Government and the Reserve Bank have taken control and the eventual and slow easing of the ban will be done under some very tight conditions.

Almost certainly banks are going to have to probe their customers a great deal more thoroughly, and get to know a lot more about their customers’ businesses, before they will be allowed to lend again.

The ideal of course is to have lending for production and normal business but not for speculation.

The fact that the lending was muddled, that customers lie and that banks were not greatly fussed means that a whole lot of conceptual thinking needs to be sorted out.

We look forward with interest over how lending will be opened, under what rules and regulations, and how these will be enforced.

Modern central banks have a lot of data and so it is possible to go beyond just regulation.

The results of what banks do, and do not do, can be exhibited on the screens of the gnomes in the Reserve Bank tower.

The second set of speculative behaviour involved the stock exchange.

When inflation is high, and real interest rates go negative as a result, people tend to climb into equities, which is fair enough.

But when they churn their portfolios almost daily to extract capital gains, borrow to buy shares and get up to some of what amounts to money laundering, even if legal, that was highlighted by the President we are seeing a stock exchange bull market driven almost purely by speculation.

Banning the complex accounting system and the use of third party transfers to fund equity purchases is clearly designed to simplify the system.

People can still buy and share shares but the money has to come from and return to their own accounts, leaving a nice simple paper trail and one that makes laundries had to operate.

Shoving up capital gains taxes to top income tax levels for shares held for less than nine months also decouples playing the exchange for income from using it for investment.

These changes are likely to be permanent, and in fact the weekend statement wanted a number of additions to the money tracking put in place promptly.

The net result of these measures will be sharp reduction in liquidity for speculation, although careful adjustment will restore required liquidity for real business and production.

The foreign currency measures were more steady progress towards dedollarisation.

The moves already in place to allow more taxes to be paid in local currency, for example, were not touched and there were no changes to the auction system application process.

The auctions will, however, be made better and more real.

Backlogs are to be cleared from Government reserves and then stopped from returning.

And the auctions will only sell what the Reserve Bank gets.

But with speculative cash missing, or at least cut right back, the change in rates will be moderate.

We have seen in recent weeks with existing rules demand being at more of the levels expected, without the stock-up pressure, and all or almost all valid bids using sensible rates and so being funded.

The previous fixing was considered adequate, when coupled with a sharp contraction in the growth of money supply, to make the system work as it should.

One of the more interesting moves was the decision to expand the interbank market and start making that rate become a “natural” rate.

At the beginning of April people were able to buy or sell up to US$1 000 a day on this market.

More people sold than bought.

So the levels have been raised five-fold. And retailers and wholesalers are allowed to use that rate with a 10 percent premium.

There is an obvious intention that this rate will eventually take over as the actual and real rate, more from the business use than the small sums traded each day, although we are talking about the daily takings for the bulk of businesses when we look at numbers rather than volumes.

The President and those doing the sums are not putting their eggs into one basket, but it is a fact that in countries where there is a functioning national currency used for all business purposes the interbank rate is the rate used and that everyone accepts this.

So Zimbabwe is taking an extra step towards dedollarisation with the bank rates, modified by whatever happens on the auctions, will move into the central position, allowing the authorities to assess progress.

Again this is likely to be permanent, since it is the desirable outcome, but progress towards ending the dual currency set up will be contingent on how effective the drying up of creating speculative liquidity can be enforced, and the enthusiasm everyone shows for eventually using the interbank rate.


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