He wanted to pay his kids’ school fees and square his debt with the contracting company. However, because of the very low cotton prices, he sold his five bales for peanuts and all the money went to the contracting company to cover the inputs he bought on credit. What he earned was not enough to repay his debt in full so they had to take his farm implements to settle the outstanding amount.
The above is a typical illustration of how vulnerable Zimbabwe has become to external shocks. We have very few interventions to redress the anomalies caused by these external shocks. The monetary policy wings are clipped by dollarization and the fiscal policy faces financing challenges.
Global recession
For cotton, the Eurozone economic crisis has resulted in reduced demand for clothing and textiles, while also suppressing output in Asia and even employment. This has put downward pressure on the price of local cotton.
The multicurrency system that we adopted in 2009 has also left us vulnerable to the exchange rate fluctuations of five currencies, which result in us importing inflation continuously and intensifying speculative tendencies. The global financial crisis of 2007-2009 had little impact on the Zimbabwean economy, largely because the domestic financial markets were not open to the international markets.
However, the multicurrency regime has significantly opened our economy to the global economy and any change in the major trading partners will be transmitted to the domestic markets, leaving our policy makers with very little option but to insulate the economy.
We have initially tried to maintain the balance of special drawing rights as a buffer, critical for meeting any exigencies and other unanticipated calamities. In 2009/10 the government maintained $215 million SDRs balance at the IMF as national reserves. However, due to the persistent liquidity crunch, the money was drawn down to inject into the circular flow to improve liquidity. The remaining $100 million from SDRs is now reserved for the conduction of the next elections.
Ideal scenario
The ideal scenario for dealing with external shocks is having liquid and well-developed financial markets that allow financial institutions and firms to hedge risks.
The central bank’s move to increase the bank’s capital thresholds, although controversial, is highly commendable in attaining this particular cause.
There is also need for a credible medium term inflation-targeting regime that anchors inflation expectations appropriately. Of equal importance is a sustainable and credible fiscal policy with favorable public debt dynamics in the case of shocks.
The question policy makers should be asking really is: What macroeconomic policy options work best in addressing external shocks?
The turbulence in financial markets and uncertainty about the outlook for global growth have all increased the importance of understanding the macroeconomic effects of external shocks and how best to respond to them. For us, our focus should really be on two issues.
Firstly, we need to provide a coherent and integrated view of financial sector reforms that would equip Zimbabwe’s financial sector growth, widen financial access and maintain stability.
It is important to develop institutions in order to reduce the frequency and magnitude of shocks, and not to delay reforms and adjustments. Secondly, there is need for a deliberate process of moving from exporting commodities to adding value to our primary goods.
Post published in: Business