Sometimes it's nice to be right, does not often happen, but in this case I am sorry that those of us who had said we are headed for trouble, were right. I am referring to the first statement by our new super star Minister of Finance. Mr. Ncube is a slim, young (by my standards) and very clever guy with an impressive record in the global financial services industry.
We (local Economists) have been saying for the past three years that the fiscal deficit was out of control, that it was unsustainable and would inevitably lead to trouble in the form of rising inflation and monetary failure. On Monday and then on Friday this week the Minister confirmed our worst fears - treasury bill stocks had risen by billions of dollars in the past three years, domestic state debt now exceeded foreign debt, interest payments were unaffordable and worst of all, the government overdraft at the Reserve Bank was 3,5 times the legal limit.
As any decent economist will tell you, printing money, in whatever form, can only lead to hyperinflation and monetary collapse. We all know that and memories of the Gono induced crisis in 2008 are still fresh in our minds. Nothing is more likely to boost inflation out of sight, than an unsecured overdraft at the Reserve Bank. Treasury Bills and State debentures are bad enough but the OD is the worst thing you can do.
Why? Because we are spending money that we are not collecting from our tax base and are unable to borrow from abroad to finance the gap that it is creating. We therefore have to manufacture (print) money to cover the gap. Bond notes are not the problem - they have been remarkably successful; the problem is the other forms of money that we have been creating.
Zimbabweans have to understand that one way or another, they will pay for this delinquency. We have been paying for it in the form of inflation - my own estimate is that we are either at or beyond hyperinflation levels already (50 per cent plus per annum) and this is reducing our disposable incomes by the same amount unless our employers have increased salaries. In addition, we pay for the fiscal deficit when our cash disappears into the vaults of the Government, or when they reach into our accounts and take our surplus funds and issue Treasury Bills (just another form of an IOU) or debentures. We also pay when inflation devalues our savings.
The decision by the Minister to recognise the existence of a local currency in the form of the so called 'RTGS Dollar' and the 'Bond Notes and Cash Coins' was overdue. It is now formal - there is no link between our bank balances and the hard currencies that are circulating. We all knew that a long time ago - the fact that the Rand and the USD have vanished from our markets is ample testimony to that. Then there is the market for the different currencies circulating - RTGS dollars - about 35 US cents, the Bond Notes and Cash a bit higher. The rate today is 3 RTGSD to 1 USD. Goodness knows where the Rand or the Pula is in this melee.
These rates are not set by stuffy officials in luxury offices at the Reserve Bank, in fact no one knows who sets the rate - it just materialises out of nowhere every hour or so and it controls transactions outside the Banking system as a whole. But the one thing everyone must understand is that when that rate appears, it affects the money people have in their pockets, in their bank and under the mattress. In fact, it is a tax on everyone and the poor pay the most as a percentage of their incomes, followed by people in paid jobs.
Zimbabwe is again a financial crash victim - a crash not between two vehicles but in money markets and the cause is the high speed nature of the printing machines at the Reserve Bank.
As any ambulance attendant will tell you, the first thing you do at a crash site is to get the victims airways clear so they can breathe and to stop the bleeding. Only when these two things are done can we then say the patient is stable and can be moved to somewhere where the other things that are wrong can be corrected. We are breathing - but only with difficulty, but we are bleeding to death and have been doing so since Zanu PF won the 2013 elections. This was the most urgent thing that confronted our new Minister of Finance.
The 2 cents per dollar on all electronic transactions is a massive tax - it will yield twice as much revenue as VAT. It is also easy to collect and will not cost anything to do so. It is a simple transaction tax and will be paid by everyone who uses the electronic payments system. In 2017 the electronic transfer system handled more than 110 billion dollars - five time our GDP and reflecting the fact that our GDP is not the formal estimate of US$20 billion a year but more like US$55 billion a year. It also reflects what economists call the circulation of money and the multiplier effect. Spend a dollar on house construction and it becomes 4 or 5 dollars of economic activity in the wider economy.
So a cent in each dollar means over $1,1 billion dollars a year to the fiscus. Our deficit this year was set at $3,2 billion dollars - 40 cents in every dollar spent by the State was being borrowed or covered by an overdraft. Inflation is reducing costs in real terms and inflating income so the deficit may be declining, but it is still $200 million a month or more. The new tax will cover this and by the end of the year the new Minister should be able to point to a balanced budget for the first time since the GNU. Then starts the job of fixing all the other things that are so wrong in our Country, Command Agriculture, inflated salaries and allowances, civil servants with no jobs, too many Policemen with no road blocks to employ them and so on.
We have to fix our tax system, make it less burdensome and easier to administer, we have to close all the loopholes in our borders and get our fiscal balances back in the black. But the Minister had to stop the bleeding and he has done that and it must not be reversed. No gain without pain.
What he has not yet done is to get us breathing again. What do I mean? When the Minister of Finance started to get us into the awful mess we are now in from a fiscal point of view, he also abandoned the freedoms we had secured in 2009 when the Zimbabwe dollar crashed. Then we had no exchange control, we used hard currencies for everything, we ran a budget surplus and 'ate what we killed'. There were no import controls and our foreign trade ballooned to US$6 billion a year and our GDP expanded exponentially by 14 times in 4 years.
Then they introduced import controls and then exchange controls and these are loved by everyone who cannot compete in an open market and all Officials who then have the right to allocate 'scarce' resources or licences. Suddenly we were back in the old Zimbabwe - we had to get an import licence to import stuff, the Reserve Bank drew up a 'priority list' for the allocation of foreign exchange. We created the new currencies - the Bond note, the Treasury Bill and the RTGS dollars. As the differentials in these new currencies widened so the 'shortage' of hard currency worsened and now we have shortages of nearly everything again and queues are emerging.
Why? Because we cannot breathe - we need the freedoms that were taken from us in 2014 and 2015. We need to take the Reserve Bank out of the exchange control business, we need to lift import controls. Why are imported goods here 3 to 4 times more expensive than in Johannesburg? It's because of the senseless controls and restrictions and the allocation systems for foreign exchange. Let the market allocate and price hard currency, let the market decide what to import.
If we want to protect our local industries then impose a tariff on finished goods - make money from the trade, but make sure that all inputs for local business are available at the lowest cost possible. If we do that, the shortages will vanish, hard currency will again be available because it is properly priced by the market and if the Monetary Policy Committee is established as announced by the RBZ Governor, even the queues outside the banks will disappear. Fiscal and monetary sanity will prevail again.
This article by Eddie Cross first appeared on his website www.eddiecross.africanherd.com
