The Sunday Mail
Howdy folks!
Zimbabweans are a very literate people and should not struggle to understand the currency developments taking place.
The country, as I see it, has not come to a point where people should look up to the sky for money raining from the helicopter that one John Mangundya is flying.
The concept of dropping money from the helicopter was advocated by American economist Milton Friedman in 1969.
And it has lately been prescribed for economies grappling with slow growth, joblessness, deflation and other economic trials.
In his essay, The Optimum Quantity of Money, Friedman said: “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
The statement above has a number of consequences for an economy facing joblessness, deflation, falling demand and recession — an economy typically such as ours.
In our case, let’s suppose the helicopter drops US$26 billion, a figure which is coincidentally similar to that which Zim-Asset is hunting.
Different people will start picking up that money – from consumers, industrialists, beggars, farmers and others.
The consumers, even the beggars, will go straight to buy goods and services, which will summarily increase the demand for goods; and inflation will start to move from the negative territory into the positive ideal.
Producers will also start to produce more, and for that they will need to employ more people. As more is produced, the economy will start to grow.
This is what Friedman was pretty much talking about.
But people will ask: Where will the money come from?
Helicopter money does not come from borrowing; it has to be printed, in a deliberate expansionary monetary and fiscal policy drive that will result in a permanent increase in the money stock.
Borrowing will only result in future debt service costs and tax costs.
Helicopter money is not new to Zimbabwe as the preceding Central Bank governor, Dr Gideon Gono, practised the tradition. Some of the projects he implemented through helicopter money include: the Productive Sector Facility, Agriculture Sector Productivity Enhancement Facility, Farm Mechanisation Programme, Parastatals and Local Authorities Reorientation Programme and the popular Basic Commodities Supply Side Intervention.
In a paper presented on April 24, 2008 and titled “Role of Central Bank Interventions Under Extraordinary Circumstances”, Dr Gono said: “Monetary authorities took a position that monetary policy must not be neutral to economic growth and development…
“The Reserve Bank had to put in place extraordinary and innovative measures and interventions to stimulate economic activity, ensure food self-sufficiency, stabilise energy supplies, arrest further economic decline and rein in on inflation.”
America and Britain have also done it.
We may want to debate the efficacy of helicopter money, but that can be a discussion for another day.
The questions that have to be asked and answered right now are whether the Zimbabwe dollar has returned or not and whether the helicopter type of approach will soon be implemented to reflate the economy from the persistent spell of deflation. These are genuine questions that every normal Zimbabwean should ask.
They have been triggered by the Central Bank governor’s Press briefing last Thursday when he revealed that Zimbabwe bond notes of US$2, US$5, US$10 and US$20 shall be introduced.
Dr Mangundya’s paper was titled, “Measures to deal with cash shortages whilst simultaneously stabilising and stimulating the economy”.
Why introduce bond notes when the cash crisis has been worsening?
Isn’t this clearly a desperate move by the Central Bank?
Is the RBZ not going to be reckless and start printing more bond notes and cause hyperinflation, as was the case during the era of Dr Gono’s helicopter money?
We should pay careful and sober attention to the mechanics of this whole thing.
The starting point is that the Central Bank established a US$200 million foreign exchange and export incentive facility which is supported by Africa Export-Import Bank.
The purpose of the facility is to cushion high demand for foreign exchange and to provide an incentive facility of 5 percent on all foreign exchange receipts.
The RBZ also explained that in order to mitigate possible abuses of this facility through capital flight, it shall be granted in bond coins and notes at par with the US dollar.
Bond notes will be issued for ease of portability, as we cannot practically have US$200 million worth of bond coins.
Bond coins are a by-product, in other words.
Here, we can clearly see that the main intention is not to have fiat bond currency as an additional amount to the existing liquidity.
An equivalent amount is actually set aside in US dollars.
In other words, we have what I would call a “US dollar standard”.
But why not just release the facility as greenback; why these alien bond notes?
Because they will curb rampant malpractices such as cash hoarding and smuggling!
You see, the US dollar is an international currency and is very vulnerable to hoarding in Zimbabwe.
Given that it is overvalued locally and the doing business and competitiveness environments are not up to spec, some don’t want to use it here.
So, Zimbabwe is just used as a conduit for rounding up all the available US dollars, and they are smuggled to other countries. Some foreign businesspeople with retail businesses here have been accused of not banking their money.
And the levels of illicit financial outflows are appalling.
Since 2009, Zimbabwe has lost US$3 billion through illicit flows, translating to an annual average of US$500 million.
These are only detected amounts.
And given the incognito nature under which these transactions occur, there are chances the figures could be much higher.
So, why inject the US$200 million when it’s going to be pumped out of our circular flow in no time?
By introducing bond currency, the appetite to hoard cash is relapsed.
No one will hoard the bond currency for the purposes of smuggling it out of the country as they will serve no purpose there.
In other words, the move encourages circulation of money in our economy, thereby abetting the liquidity situation.
This should be seen as a pragmatic move, not a desperate one.
One would want to say that we are actually borrowing these bond notes since they are backed by a US$200 million facility from Afreximbank.
No facility, no bond notes.
But what stops the Central Bank from printing bond currency worth a billion dollars behind our backs?
Fair question!
But that would also mean increasing the Afreximbank facility to US$1 billion.
Which is bad?
I bet not; as long as we can convince Afreximbank to do that.
In any case, why should we be doubtful of the Central Bank’s ability to be prudent with the facility when they actually did not exhaust the US$50 bond coin facility?!
It has only managed to mint bond coins worth about US$25 million to date!
So, if the RBZ actually underutilised the initial bond currency facility, why should it not be given the same trust that it will not be prodigal and overprint?
The only downside to the arrangement, in my view, is that, since the bond currency is pegged to the US dollar, we will remain allergic to the effects of a strong greenback.
As the US dollar gains strength, it transmits the same amount of strength to the bond currency, thereby threatening the competitiveness of the country on the international market.
So, the same demerits of the US dollar perpetuate.
Gulf Co-operation Countries are also in the same quandary, ailing from the adverse impact of a strong dollar as most of their currencies are pegged to the greenback.
The United Arab Emirates’ and Qatar’s Dirham and Riyal, respectively, have been strengthening with the greenback, much to their policy-makers’ dislike.
Saudi Arabia is also feeling the heat, as the stronger dollar suffocates its oil prices.
Folks, I think we should rely much on the mechanics of policy in trying to understand the currency situation in our country, and less on sensationalised sentiments shared on WhatsApp, Facebook, Twitter and other social media platforms.
Otherwise, this important issue will be reduced to a mere joke, just like some are doing to the poor chihuta.
This is a fundamental national issue that may negatively affect our financial sector, if not handled properly.
Dr Mangundya is clearly not going to drop any cash from the helicopter and deserves to be supported in his measures to improve the liquidity situation in the country.
Business, just like it supported bond coins, should also be at the forefront of supporting bond notes, to instill confidence in members of the public.
I also expect the Bankers’ Association of Zimbabwe to support this move.
Since the actual introduction of the bond notes may happen in a couple of months, the Central Bank should utilise the time between now and then to consult and work on strengthening this system.
Chances are that, if not perfected, it may be abused, with some people exchanging the bond notes for the US currency, and then smuggle the hard currency out of the country.
Granted, there is a priority list to govern the utilisation of foreign currency; but this country really needs to step up efforts in plugging off fraud and illicit financial outflows.
Otherwise, we may put maximum limits on amounts allowed to be taken abroad in vain; so long people have alternative means that are illegal.
Later folks!
Ends
