Patrick Chinamasa, in what is likely to be one of the final acts of a
Zanu-PF finance minister, stopped short of full dollarisation for the
simple reason that Zimbabwe does not have the foreign currency to buy
back the local currency issue or pay the civil service, police, army,
teachers and nurses.
Because the finance minister post in the new inclusive government to be
set up over the next week is likely to go to the Movement for
Democratic Change (MDC), the Chinamasa budget is expected to have a
short shelf life. This is because the dollarisation formula is a sham
and because the MDC is in a hurry to stamp its authority on economic
management, which will involve sacking Reserve Bank governor Gideon
Gono.
It is based on the flawed assumption that workers will accept wages in
worthless Zimbabwe dollars while paying some of their taxes,
electricity bills and school fees in US dollars. Chinamasa has insisted
that Zimbabwe dollars will circulate alongside foreign currencies – US
dollars, rand, pula and sterling – and that consumers will be able to
use their currency of choice. This is nonsense.
Today, virtually no-one will accept Zimbabwe dollars except a few
parastatals that continue to accept payment in local currency. But even
the parastatals have announced plans to switch to US dollars the minute
they secure government approval. Schools and universities have made the
switch already and on Saturday a housemaid in Harare’s northern suburbs
was told her daughter’s school fees will now be US$200/ term, or three
times her monthly wage.
But she, like the civil service and the majority of the private-sector
workforce, is not paid in foreign currency. According to Chinamasa, she
can pay the school in local dollars, but at the exchange rate used in
his budget of Z$350 quadrillion to a single US dollar, she would have
to find Z$7 000 quadrillion. In fact it could be worse because
Chinamasa’s budget exchange rate conversion of Z$350 quadrillion was
based on the UN operational exchange rate for January. That was
devalued to Z$150 quadrillion from February 1, meaning that the Harare
housemaid will need to find Z$280 000 quadrillion. On the other hand,
if school fees are levied at the new exchange rate announced by Gono on
Monday she will have to pay "only" Z$4 000 trillion.
In his follow-up monetary policy statement this week, Gono further
muddied the waters, insisting that the Zimbabwe dollar "remains the
country’s legal tender… and shall continue to be used as a medium of
exchange for all transactions". All sellers must display or quote
prices in both foreign and local currency. The conversion exchange rate
will be determined in the inter bank market. "We are not dollarising in
the technical sense of the word," he said, but "multi currencying" the
economy.
With a stroke of the pen, Gono both slashed another 12 zeros off the
Zimbabwe dollar and fixed a new exchange rate (to be used for all
business transactions) of Z$20 (revalued – former Z$20 trillion) to the
US dollar and Z$2 (previously $2 trillion) to the rand. In the past 30
months Gono has revalued the local currency three times, taking off a
total of 25 zeros since August 2006.
The new official interbank exchange rate is a far cry from that used in
the shops. On Monday, a leading supermarket – one of very few still
selling bread in both local and foreign currency – was using an
effective exchange rate of Z$300 trillion. Gono’s Z$20 trillion ($20
revalued) exchange rate makes a mockery of his proposed dual pricing
system. Retailers will flatly refuse to accept local currency at such a
hugely overvalued exchange rate.
Zimbabwe earned $1,75bn from exports last year, according to the
central bank or, even worse, $1,35bn if the budget statement figure is
accurate. In a dollarised economy, foreign currency earnings put a lid
on money supply (on how much the country can spend). Since 2003
Zimbabwe’s economy has been kept afloat by the use of quasi fiscal
activities (QFAs), whereby the Reserve Bank took over the financing of
government spending by printing money on an unprecedented scale. Under
dollarisation the central bank can no longer print money. So, Chinamasa
and Gono have come up with the wheeze of printing not US dollars, but
vouchers denominated in foreign currency.
Civil servants will continue to be paid in local Zimbabwe dollars, with
a "top-up" monthly allowance, denominated in US dollars or rand that
will be paid in vouchers. In theory, but almost certainly not in
practice, these vouchers, said to be sufficient to buy basic essentials
for a family of six, can be exchanged at supermarkets and other shops.
But retailers who stocked their shelves with product paid for in
foreign currency will not accept unconvertible vouchers printed by the
Reserve Bank. Nor will banks because, like the government, they will
not have the foreign currency to redeem vouchers deposited by their
customers. Within weeks, if not days, the vouchers will be as worthless
as the Zimbabwe dollars they are meant to replace.
Because private-sector employers will have to pay their workers in
foreign currency, they will not be able to print their own vouchers.
Morgan Tsvangirai, as prime minister in the new inclusive government,
will come under irresistible pressure from the civil service for
similar treatment. He will hope that foreign donors will come to his
assistance. But though donors are certain to step up disbursements of
humanitarian aid – food, medicines – they are likely to be more
circumspect when it comes to funding recurrent consumption spending of
an administration still headed by President Robert Mugabe. "Governments
of national unity don’t work," one Western diplomat told the FM. "We
will have to wait until there is a substantive administration in place
in two or three years."
In his budget, Chinamasa projected US dollar income of $1,7bn in 2009,
based on the assumption that normally the tax take in Zimbabwe is about
30% of GDP, which he estimated, very generously, at $5,5bn.
Government spending this year is forecast at $1,95bn, leaving a
deficit, before grants, of $250m. But with foreign aid of $200m already
promised, Chinamasa was able to claim that his budget was balanced.
This is overoptimistic. Most economists put GDP nearer $4bn than
$5,5bn, meaning that total revenue would be $1,25bn, leaving a budget
deficit of about 17,5% of GDP. Because the economy is now dollarised,
there is no way of financing this budget deficit from domestic sources.
The official calculation seems to be that Tsvangirai will be sent
globe-trotting to drum up the foreign money needed to close the yawning
budget deficit.
Furthermore, foreign exchange earnings will fall sharply this year as
platinum, ferrochrome and nickel earnings feel the heat of the global
recession. Diaspora remittances, variously estimated at anything from
US$500m to $1bn/ year, are also falling as conditions get tougher in
source markets like the UK and SA and cash transactions through the
parallel market lose their appeal. The net result will be increased use
of goods rather than cash for remittances.
There is a plan B, set out in the leaked – and reportedly much-revised
– version of Gono’s monetary policy statement, in which the governor
claims that the government-owned diamond fields in the
Marange-Chiadzwya area of Eastern Zimbabwe will generate monthly
diamond revenues of $1,2bn – four times the value of Botswana’s annual
production. This seems hugely improbable, especially in the light of
current conditions in global markets and the fact that mining
development there is in the most preliminary stage.
After decades of inflationary budgets, Zimbabwe at last has a
deflationary one, though whether it can be made to stick is
problematic. Dollarisation, even in this form, ought to bring down
inflation from its stratospheric – and unquantifiable – levels of
trillions of percent a year to double digits within 12 months. This is
assuming that the government sticks to its plan which, unless bailed
out from abroad, it almost certainly will not.
It won’t be just inflation that will come down. Dollarisation will also
be contractionary in terms of output and employment, unless the US
cavalry comes riding to the rescue with billions of dollars of foreign
aid.
The probability is that Chinamasa’s budget will soon join the already
crowded scrapheap of failed Zimbabwe economic recovery plans. How soon
depends in part on whether the MDC decides to jettison the budget,
replacing it with its own, hopefully workable, plan and on how much
longer public-sector workers will continue to suffer in silence. –
Reproduced from the Financial Mail with permission.
Post published in: Agriculture