| The best Zimbabwe news site on the world wide web |  |
| NEWS |
| FORUMS |
| NEWS ANALYSIS |
| READERS' FORUM |
Gono's reforms grounded by bad politics
By Gari
Tuso
WE ARE now more than halfway through the 21-days of Gideon Gono's currency
reforms announced at the start of August.
Hats off to Gono for coming up with economic survival tactics for our beloved country. This man has made serious and visible sacrifices for the betterment of our lives in Zimbabwe.
His currency reforms are probably the second best option for a new currency. It is the old currency rebased or redenominated but it’s a form of new currency.
The new currency option was long overdue for Zimbabweans considering the pain, stress and inconvenience of carrying huge sums of cash to buy so little. To the business community it is now more convenient and less cumbersome dealing with smaller figures instead of huge-inflated figures that could have affected the smooth running of some computer software programs in banking and accounting institutions. Imagine the Reserve bank, financial institutions or private companies dealing with arbitrary numbers like zillion, googol or googolplex, which require exponents.
In addition to that, the most serious and catastrophic problem was the excess liquidity in the hands of private dealers and speculators in the informal market as a result of forex and fuel shortages. This obviously jammed and almost paralysed Gono’s monetary policy in dealing with money supply and inflation that we all know is over 1000%, the highest in the world.
The mopping-up of excess liquidity from the informal sector back to the official market will have a significant positive impact on monetary policy efficacy. The 21-day deadline has seen lots of dealers & speculators taking the old currency back to the bank. For those who decide to buy assets, the cash used will still find its way back to the official sector.
At least the Reserve Bank can now control and manipulate money supply that is vital for setting up inflation targets. This is good news for the country because the financial authorities are back on the controls. The question is how sustainable is this?
Gono’s economic policy challenges today could be likened to those of the former president of the US, Ronald Reagan in 1980. Devastating stagflation led to Reagan’s tightening of money supply by raising interest rates to very high levels, sparking a recession but effectively taming inflation. Under ‘Reaganomics’ the small government was both a fiscal imperative and a political belief. Reagan believed that reducing taxes would free individuals and businesses to invest elsewhere, thereby maximising economic gain. This meant reducing government programs accordingly. The success of Reaganomics is up for debate but its legacy can be traced throughout U.S. economic policy. Reagan was well known to stick to his economic convictions.
Gono is in a worse situation than Reagan. Gono is not the President or Minister of Finance but at the helm of economic policy formulation and implementation and running the show. We read that his life is in danger from the greedy and powerful who have amassed wealth since 1980 and have now adopted a die-hard resistance attitude to change.
Whilst he might have his own economic convictions, Gono might not be able to fully implement his monetary policy without any interference from other top politicians. His influence and control on the fiscus is very minimal and as a result fiscal policy pulls in a different direction from monetary policy.
Unlike Reagan, Gono’s economy is infested with chronic forex shortage, erratic fuel supplies, hyperinflation, speculation, corruption, aids pandemic, brain drain and poverty. We all know Gono has very limited powers and solutions to deal with all these problems.
Gocusing on corruption and speculation alone, Gono does not have enough powers to dismantle and disentangle the nucleus of corruption and speculators in government and the ruling party. It is very difficult to budget and set economic targets in an environment full of corrupt officials.
In fact, it is almost impossible to construct a macroeconomic model for Zimbabwe that factors in or incorporates corruption. Economic models are constructed based on certain assumptions and unfortunately (for the greedy and corrupt) corruption is not one of them.
Gono’s whole macroeconomic terrain is very rough and unique. His monetary policy ceases to be just the ‘traditional’ basic one, but one that now factors in the police, secret agents, green bombers, zimra, and probably the army and airforce. The fact that some ordinary people were robbed of their ‘hard earned cash’, some of it from the Diaspora trying to help their relatives do small businesses, will harden them. This might create further distortions and imbalances that could lead to more chaos. The most painful thing is, that the ‘corrupt’ top brass, who are the greatest of all speculators in government and ruling party, were not raided.
If Gono’s economic policy tactics succeed and catapults Zimbabwe from the doldrums, he will deserve a Nobel Prize.
Even today, more than ‘half-way’ through the 21 day-grace period, some people still ponder on the following issues about ‘triple zero’ recipe!
Question: What does slashing the three zeros from our currency notes really mean? Is there any mathematical explanation? Does this mean our income will buy less than before?
Answer: It is a simple arithmetic gimmick. The old currency notes were divided by 1000 being a common denominator. In fact, the currency notes were multiplied or deflated by a constant that is 1/1000 or 0.001 in decimal form. This fraction can simply be called a re-denomination constant since it was not derived. Thus Z$10 is now Z$0.01 or 1 cent, Z$100 is now Z$0.10 or 10 cents, Z$1000 becomes Z$1, then Z$1000 000 now Z$1000 and so on. Since our incomes and prices of goods and services were deflated by the same magnitude, it means nothing has changed apart from just dealing with smaller figures.
Question: Does this mean inflation has dropped or rather has the prices of goods and services really gone down and become cheaper?
Answer: Yes the prices of goods and services have gone down but relative to the rebased currency. This does not mean the goods and services are cheaper, since the purchasing power of the rebased currency is still the same with the old currency. For instance, Z$200 000 ‘old’ converted to Z$200 ‘new’ still buys the same loaf of bread. The prices of goods and services and our incomes have been adjusted by exactly the same magnitude as the currency notes. Inflation has not dropped at all and that’s why the purchasing power of the new currency still equals the old one.
The official report that inflation has already dropped to 993.6% (by about 192%) within a few days leaves a lot to be desired. Are we saying 0.01 re-denomination constant effect has reduced inflation by 192%?? Are we saying currency notes are now a determinant of inflation? Currency notes are just a ‘medium of exchange’ that assumes the value of our incomes and goods prices. It is not currency notes that determine inflation but our incomes and prices of goods and services. Using the law of proportions, the Consumer price index (CPI) or Retail Price Index (RPI) that measure inflation does not change when our incomes and prices of goods are slashed by the same magnitude.
It would have made much sense to say the new currency introduced, temporarily dampened the speculative spirit, resulting in prices of goods and services remaining stagnant for a few days. We all know prices cannot be flexible downwards in Zimbabwe right now because of the continuous acute shortages of fuel, forex, etc and, in addition, the broad money supply that has been ejected into the system is very inflationary.
Question: How sustainable is Gono’s rebased currency?
Answer: Coming up with a new currency, is probably the first sign of desperation by the authorities and accepting the economic situation in Zimbabwe has reached a critical point of no return. As we enter the 18th day of Gonomics, prices of fuel, forex and other goods have started rising. Imagine! How then do the authorities explain a drop in inflation to 993.6%? What I am really sure of is, from now onwards, we are going to witness a serious inflation-speculation spiral in the country. Retailers will continue to increase the prices of goods, dealers and speculators are already gearing up for the new challenge and becoming more sophisticated. As a result, Gono might be compelled to slash zeros again taking us to ‘phase two’.
Way Forward:
To achieve long-term economic sustainability, the political playing field needs a complete overhaul now. We need a new team that will allow for sound and disciplined macroeconomic policies to prevail. The old regime that has plunged the country into a deep and almost irreversible economic crisis is now obsolete, out of ideas, irrelevant, short sighted and now thriving on corruption and mismanagement.
Zimbabwe now needs young, vivacious and vibrant people who, not only grasp and understand the needs of the future generations, but can stand up to the modern challenges of globalisation and new world order.
The dead truth is, Gono’s economic policies will remain ineffective for real, due to frustration from the government and Zanu PF. All we are going to see and experience now is a vicious circle of corruption, shortages, hyperinflation, speculation, new currencies and much bigger parallel market.
Gari Tuso is
a Zimbabwean economist and businessman. He can be contacted at tushgc@gmail.com
JOIN THE DEBATE ON THIS
ARTICLE ON THE NEWZIMBABWE.COM FORUMS
debate@newzimbabwe.com
All material copyright newzimbabwe.com
Material may be published or reproduced in any form with appropriate credit to this website