Monday, 30 January 2017
The need for a new paradigm shift in Zimbabwe
For any economy to grow and develop, it has to invariably balance the uneasy macro-economic triangle. This triangle is made up of the macro-economic trinity of fiscal balance, monetary stability and external balance (which includes the trade balance and the net debt position). Although this uneasy triangle is important for the reinforcement of growth, it does not necessarily substitute other growth enabling policies and programs such as infrastructural development and investment promotion. Zimbabwe’s perennial problems of macro-economic stability primarily stem from the failure by authorities to balance the uneasy triangle.
To drive my point home let me start by unpacking the financial sector. In 2009, bank deposits barely stood at USD800 million. By the end of 2013, bank deposits had risen to USD5billion. This was a phenomenal growth in the financial sector reflecting the growth in the real sector which averaged 7% per annum. Financial sector stability improved and during this period loans in the amount of USD 3.5 billion were disbursed to the private sector. Inflation remained in the negative. Most banks’ liquidity positions improved and so did capitalization. Of course there were still bad apples that suffered from bad loans and poor corporate governance. These banks eventually collapsed – although some still think they were forced to collapse. This debate is for another day.
My point is that financial stability is good for macro-economic stability and growth. The custodian of monetary policy is the Reserve Bank. The Reserve bank tried to maintain financial and monetary stability post 2009 although its hands were tied by dollarization. Under dollarization, the RBZ lost some of its most important core functions. One of the most critical functional tools lost to dollarization was the exchange rate. Previously, the exchange rate had been used to devalue the Zim dollar and boost exports.
The RBZ lost its powers to set interest rates because it was no longer the bank of last resort. A host of other money market operations were also lost. But the RBZ still retained its general supervisory and regulatory functions. After 2013, economic growth faltered gradually. In 2016, the economy grew by 1.6% and the financial sector suffered the consequences. Bank deposits declined to USD3 billion by end of 2016. The situation was made worse by the panicky withdrawals and the run on deposits that characterized the greater part of 2016 leading to an unprecedented cash crsisis.and the subsequent introduction of bond notes. Thus, the financial crisis mirrored the crisis in the real sector of the economy. This point is important because there are some analysts who miss the point and think that the Reserve bank can stimulate growth per se. All in all, the financial sector was abused by the issuance of Treasury bills. In 2016 alone, it is thought that government issued TBs in the amount of $4billion. The majority of these TBs have not been redeemed. Pension funds, mutual funds and building societies were badly exposed to these TBs. To this day, one of the building societies has not recovered from the exposure.
Continued next page