The Return of Hyper-inflation and Suggestions for Fixing the Problem
Who is there?
Who are you?
C’mon have you already forgotten me. I was here ten years ago…?
I wasn’t here ten years ago
Oh I see…my name is hyper-inflation I used to hang out with that fella Gono.
Hyper-inflation is back albeit in a slightly different from what we saw in 2008. Ten years ago our supermarkets emptied out. We were importing basic grocery items from our neighbors. There was literally no fuel in the country except for those that could import directly. In the editorial section of today’s (1/10/2018) Herald, the author(s) acknowledges that the prices of goods have been going up. Only one commodity has remained stable; fuel. And that is the problem. Today the Governor of the Reserve Bank will be presenting the Monetary policy. In this blog I will make some suggestions of what I would have done if I was the Governor (but thankfully I am not)-he has an unenviable task. It doesn’t look like he is spoilt for choice.
What is the real problem?
There are a number of problems contributing to hyper-inflation in Zimbabwe, however the lack of sufficient foreign currency reserves to pay for imports is the major one. Zimbabwe faces a unique challenge compared to her neighbors, she can’t access any Balance of Payment (BoP) support. The former minister of Finance, Honorable Biti was very right when he said, ‘you eat what you kill’ but practically that is impossible for a variety of reasons. Many developing countries especially our neighbours in the sub-region, receive what we call Direct Budgetary Support (DBS) and in some countries it’s as high as 40% of the total budget. There are many reasons why Zimbabwe does not have access to DBS or ongoing BoP support and that is a discussion for another day. By his own admission the current Minister of Finance says the country only has $200million as import cover when it should have US$1billion. However, this problem has also been exaggerated by the pricing system at play in the country. There is no reason whatsoever that justifies paying for anything using real USD cash(notes) when you can change it at the parallel market and get double for it. We have a problem of speculation.
The second set of problems have to do with options or choices of what to do with the scarce resources they have, to achieve optimal returns. I think this is where the existing RBZ strategy is inadequate.
The fuel industry in Zimbabwe is mostly dominated by private players; a combination of multinationals such as Total, Engen, Puma and also local players. The RBZ has put fuel at the top of its import list. Strategic? Maybe. The fuel companies pay for the fuel with local RTGS money (transfer from their local bank to the RBZ’s account) to get a commodity that has been paid for in foreign currency. They sell this commodity using local prices (1.32 per litre)-which literally translates to US$0.58 per litre or even less depending on where the RTGS to US Dollar rate is today. Yes there is a foreign currency shortage in the country but this subsidy has effectively ensured that no one in his right mind will pay for fuel using the real United States Dollars. You pick the little dollars you get either from the foreign currency remittance outfits or from your bank but you do not head to the fuel station first, NO, you call one of the money changers and for US$100 they deposit RTGS$220.00 into your account. Drivers of cross border trucks and buses from neighbouring countries have also caught on to this. They get cash from their companies either in Rands or USD get to Zimbabwe, change the money and also get fuel at a subsidy. This does not need a smart person to figure out how this is playing out,-even the folks at RBZ should be aware of this.
Generally, a subsidy of this nature and size needs to be better managed instead of pretending as if market forces are at play. Over the years Economists have figured out that it is inevitable for human behavior i to abuse such state-based facilitiesyet our government does not see the need to manage it. They let it just play out until we have a problem. Remember at the onset of dollarization we could withdraw US$1,000.00-remember those days? Other forward looking chaps who have lived long enough in Africa knew that those days would come to end but not our government. Even chaps from the sub-region took advantage of this loophole-just deposit Malawi/Zambia Kwacha equivalent into your local account, drive down to Zim pick up USD in Cash and go back play around with it-selling it back and forth- and you are back again.
Moving on-where else do we have a problem? Airline tickets. It currently costs around RTGS$350 (US$165) for a return trip to Johannesburg from Harare. Air Zimbabwe has to pay for their landing/handling fees and other related costs using either real United States Dollars or South African Rands in Johannesburg. Where do they get the foreign currency to make such payments? Oh but of course from the Reserve Bank. This is a subsidy for air travel- Zimbabwe should rank as one of a very few countries that subsidizes their citizens to travel outside the country and in the process externalizing the scarce foreign currency.
What can be done in the short to medium term.
The new government has taken a turn to the right, we are about to see ESAP round two. In that regard- the long-term plan as suggested by the new Minister of Finance and also by the Reserve Bank of Zimbabwe Governor sounds like a standard stabilisation program and if government commits to the raft of measures that are required to make it successful a turn-around in increased production is likely to manifest in mid to end of 2019. However, both the Minister and the Governor have been ambivalent about what needs to be done today. There are a number of measures that the RBZ should consider as a matter of urgency.
Remove the fuel subsidy
The fuel sector and indeed the road-based passenger and good transportation services are dominated by private sector players whose main goal is to make profit. The Government of Zimbabwe should allow the private players to import their own fuel. As an incentive they should be given advance notice to say we will only supply you with fuel for the next thirty days after that ‘indoda iyazibonela’(‘One man for himself and God for us all’). I can assure you they will come up with measures to remain competitive. They should be allowed to come up with their multi-pricing schemes and to keep the foreign currency they receive. The same forex that has been elusive will suddenly re-emerge. Fuel will continue to flow as long as they are allowed to place their orders without having to wait for the RBZ to make payments on their behalf. People will still drive their cars no matter what. Besides we are heading towards the festive season- our brothers from SA and other neighbouring countries will be awash with cash. This alone will allow the RBZ to focus on securing foreign currency for other critical sectors such as for drugs/medical equipment and to also help manufacturing companies secure inputs needed on time.
Multi-tier pricing of RTGS and Bond note.
I never thought we would have to say this to the RBZ- surely after 2008 you know of the parallel rate. Why do we want to act as if it does not exist? Please allow every retailer to have multiple rates? In other words, put your RTGS currency as part of the multi-currency system and let the market determine the rate instead of this lie of a 1:1. It does not exist. You will be surprised… the dollars will come back into circulation.
Think about the Bottom of the Pyramid
We have a challenge of free-riders- the existing subsidy system unfairly benefits those who can afford the real prices of goods. The GoZ has been lazy all along-they know this problem exists but were not keen to devise a strategy to resolve it. How do you come up with a targeted subsidy system without creating a new bureaucracy and also new forms of corruption? They have to consider this; one of the ways would have been a state/municipality owned bus company. But consider this, a brand-new bus costs around US$40k. Is it not better to commit just US$10million to revamp ZUPCO and ensure that its run professionally to recover costs and not to make super-profits? By the way that figure US$10million is way less than what the national airline requires. How many of our people fly on a daily basis? I urge government to consider revamping ZUPCO instead of AirZim at least for now. I hear others saying that this will take forever-yes given the existing bureaucracy, but if they wanted they can revamp ZUPCO within a month or even create a new entity with 250 brand new buses-just with US$10million that can ply most of the local routes. This will be the entity to enjoy the fuel subsidy.
In terms of commodities; this is where it gets messy- government should consider resuscitation of major manufacturing companies. The companies that are resuscitated using cheap government money should also be under some form of pricing regime as part of the loan repayment. This will significantly allow for locally manufactured goods to compete locally.
Finally the message is for the RBZ Governor to consider reducing government’s commitment in securing foreign currency, allow for the market (especially banks and fuel importers) to resolve the foreign currency shortages without meddling and instead focus on how to cushion those at the Bottom of the Pyramid from the inevitable harsh structural reforms that are coming.
 We foresee many challenges with the turn towards neoliberalism especially around inclusion and investments in social policy.