THE recent monetary policy statement saw the introduction of measures to restrict the externalisation of liquidity from our country. On my previous post on liquidity (which you can access here), I talked about a hypothetical economy made up of just two people with a money stock of only US$1, which was all owned by one of the two people in the economy. One interesting feature about that economy was that even if the owner of the money were to loan out his US$1 at a very high interest rate (5,000 percent), the other guy would have managed to repay that loan eventually. The main condition required for this to work was that the $1 in the economy remained accessible for the borrower to repeatedly earn it. The recent monetary policy statement aims to accomplish the same effect.
I have noted a couple of structural inefficiencies in our economy over and above that of externalised liquidity. I will briefly cover three more inefficiencies that I believe we need to work on as a country.
The topic of high interest rates has been in the headlines for a couple of years and even though it is said that lending institutions have lowered interest rates, if you recently took out a loan, you would be inclined to argue that the contrary holds true. This may come as a surprise to you, but I have no problem with high interest rates. The country carries a high level of risk and it is because of this that we suffer from high interest rates. What bothers me however is that the high interest rates are not filtering through to the depositor. This is a serious structural weakness in the economy that needs to be remedied. Fixing this issue is likely to result in a significant increase in deposits and a resultant decrease in interest rates that all businesses are asking for. You can hold dozens of seminars on financial inclusion and how to attract the informal sector into banking, but if this issue is not addressed, we are likely to make little progress on these other issues.
It is quite interesting to look at the ripple effects of the US Fed Reserve’s decision to increase its base rate by just 0,25 percent. Such a marginal increase moved its way into their economy and also into the global economy as investors realigned their portfolios by moving their money out of emerging economies.
The price of fuel
While global oil prices are hovering above the US$30 a barrel mark, prices on the pump here in Zimbabwe only managed to decrease by a few cents. It is said that Zimbabwe imported about $1.2 billion worth of fuel in 2015 – when the average price of oil per barrel was much higher. A back of the envelope calculation reveals that the current oil price decline could have resulted in a virtual stimulus to the tune of hundreds of millions a year. This is money that can potentially stimulate our ailing economy but is disappearing into the supply lines only to be enjoyed by a select few.
I have gone on record so many times saying that the mother of all risks is conflict of interests. By far the biggest structural weakness present in our economy is that of misaligned interests. In the world of finance, misaligned interests lead to agency costs. An example is when a company’s management seeks to maximise their allowances and salaries with little regard to the needs of shareholders who desire profits. Indeed, in my line of work, I have reached a conclusion that every financial problem has a solution – the problem is that at times, that solution can lead to marginal losses to the decision makers. The end result is that the appropriate fix is never applied. Most of the problems we see in our economy can be attributed to misaligned interests in some way. One of the easiest ways to ensure that interests are aligned is to make use of performance based salaries. Look at how many local authority budgets were not approved by the Ministry of Local Government. If someone’s job is to mend our roads and provide us with clean drinkable water but their salary bears no relation to whether or not they actually deliver on their job then we would have practically given them an incentive to increase their salary to infinity.
Zimbabwe’s economic outlook is not looking good especially with the erratic rainfall that we received and the low commodity prices on the international markets. I suggest that we desist from shooting ourselves in the foot by addressing the structural flaws that are exacerbating our economic demise.
Thomas Sithole is an Actuarial Analyst (Enterprise Risk Management) at Bluecroft Actuarial Solutions. Please refer to his corporate profile on this web address to contact him: thomas.bluecroftsolutions.com
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