The Financial Gazette

Dumisani Ndlela, Deputy Editor-in-Chief

On Tuesday, Reserve Bank of Zimbabwe (RBZ) Governor, Gideon Gono, was the bearer of uncomfortable news: Several downside risks in the country’s fragile economy are likely to have potentially “adverse ramifications on the budget”. By implication, there will be an economic slowdown, certainly a dire outcome for an economy whose wounds are still open. It’s not particularly easy to differ with your principal, especially if there are bridges to mend, but, if one’s task is to proffer impeccable advice to the exchequer, as the Governor does, there is little reason to muster nerve.
Yes, Finance Minister, Tendai Biti, indicated in his 2012 National Budget not long ago that the economy, which has experienced growth for three consecutive years since 2009, would grow by a projected 9,4 percent in 2012.
Biti spoke about maintaining “growth momentum” in 2012, underpinned by further positive performance across various economic sectors.
Yet in his Monetary Policy Statement for 2012, Gono appeared to burst the bubble.
Gono began by noting: “The pertinent question for Zimbabwe, which we should grapple with in 2012 is whether the country can sustain the growth trajectory witnessed since the onset of the multicurrency system in the face of stalling global economic activity, under the same monetary regime. Despite limited integration with the capital markets in advanced economies, the costs and risks of a fall from the country’s growth path attained in the past three years remain disconcertingly high.”
Gono points out that firming global food and fuel prices, partnered by the likelihood of a drought affecting the country and some parts of the region, would have serious implications on the National Budget.
Since transformation of the country into a hard currency market, Zimbabwe’s economy has been on an upward spiral, indeed with enviable growth records during the last three years.
But the National Budget has been largely a consumptive one, with very little capital expenditure in place. In a normal economy, this would have courted disaster; overloading a national budget with recurrent expenditure spawns inflation, dragging growth in the process.
When this is compounded by large fiscal deficits, the situation is characteristically a haemorrhage as government resorts to significant borrowing, crowding out the private sector in the process.
Zimbabwe’s case can at best be described as abnormal, although it would be fair to credit Biti for some good measure of fiscal discipline — his “hunter and gatherer” approach has meant that he does not squeeze the private sector out of the little money available on a cash-strapped market: Recourse to the domestic money market would have created a catastrophe in terms of its effect on already bizarrely high interest rates on the market.
Gono notes that fiscal revenues are likely to suffer due to declining global economic activity, which would inevitably hurt commodity prices.
And he warns: “Under the multicurrency system, the country has virtually lost monetary policy autonomy, making it difficult for the country to intervene with appropriate stimulus packages in the event of exogenous shocks. As a result, the onus should be on caution and preparation for action, being conscious of the absence of adequate foreign exchange reserve buffers to respond to exogenous shocks.”
Indeed Gono’s own turf has, to a large extent, been shrivelled by the deprivation of Zimbabwe’s own currency. This makes his role much less adrenalin-raising —  the task for inflation control now rests largely on fiscal policy, or, to be fair, retention of the multi-currency regime.
With due respect, fiscal policy has been littered with bad strategy: inexplicable duty pronouncements; a punitive tax regime that has already triggered a fresh wave of skills flight as well as concerns within the mining industry over unrealistic royalty hikes; half-hearted concessions to bring the manufacturing sector back to life; and, lack of incentives to push dom-estic industries into aggressively pursuing external markets in order to grow the stock of foreign currency — or money supply — in the hard currency economy.
There is indeed a bubbling catastrophe within the economy, but it is concealed by the fact that the country is emerging from its worst crisis in history that makes the present pain a picnic compared with experiences of the past.
But more and more companies are showing increasing stress, despite statistics indicating an improvement in capacity utilisation within the manufacturing sector. By The Financial Gazette’s estimation, over half of listed firms were already lurching into insolvency.
Unemployment remains too high and is growing.
Yes, the economy has had a semblance of stability since transforming into a hard currency in 2009, and that hard currency regime is  the single largest cushion against disintegration. No wonder Biti swears by the US dollar. Without it, he has vowed to quit that prestigious job in the inclusive government.
Indeed the majority of Zimbabweans would hate the comeback of the country’s domestic currency. With industries still struggling to survive and the export sector sluggish, defending a local currency against inflationary pressure and, consequently, daily erosion, would be an insurmountable task.
Yet it was evident Gono was grappling from an emasculation of the central bank’s role caused by the demise of the local currency: There is no lender of last resort in the banking sector, and financial intermediation by the banking sector is insignificant due to a cash crunch.
“The intermediary role of banks remains critical in the re-deployment of surplus investible funds into key productive sectors of the economy. This is particularly so given persistent liquidity challenges that have lingered in the economy since the introduction of the multiple currency system,” Gono said.
Analysts have called for a restoration of interbank lending, and this is only possible if the central bank is adequately capitalised to ensure, they say, that confidence on local financial institutions is re-established.
On adoption of a hard currency regime in 2009, the central bank became hopeless in giving liquidity support to the banking sector. Without that support, banks are uneasy trading with each other due to potential systemic risks within the sector. Biti pledged a US$100 million lender-of-last-resort facility whose details the market is still awaiting.
The RBZ also lost its role as the government’s banker; the exchequer resorted to private banks and that, say analysts, damages the public's confidence in the central bank and makes it difficult for the RBZ to borrow on behalf of the government whose accounts are held by other banks.
Any central bank should complement government, and monetary policy should be an implementing agency for fiscal policy. But when the central bank’s role is weakened, that becomes impossible.
Gono appeared to suggest an acceleration of efforts to restore the central bank’s lender-of-last-resort role is already in place. He said: “As monetary authorities, we remain indebted to the Minister of Finance for his support in concerted efforts geared at resuscitating the lender of last resort (LOLR) function of the central bank. This is evidenced by the recent injection of US$20 million to further boost the LOLR facility. This amount is over and above the existing US$7 million. Once the funds have been transferred to the Reserve Bank’s accounts, banks with the requisite collateral can start accessing it. Additionally, the advanced negotiations with Africa Export Import Bank are envisaged to culminate in the further boosting of the LOLR facility by an additional US$80 million.”
He implored “market players to deal amongst themselves as we continue to observe that while some banks are facing liquidity challenges, others are sitting on large balances on their RTGS accounts or in their Nostro accounts”.
It’s still going to be a function of confidence.