Zimbabwe Review

Reflections on Zimbabwe

Gono again blames inflation symptoms; causes, solutions remain beyond his control

Posted by CM on December 6, 2008

For the five years that Gideon Gono has been governor of the Reserve Bank of Zimbabwe he has tried all kinds of things to try to prevent inflation from shooting way out of control. All have failed.

But the economic, social and political pressures of hyper-inflation are so strong that he must be seen to continue to be trying to control it, even though its ultimate causes are way beyond his purview.

One does not need to be an economist to understand how falling productivity in agriculture, mining and other sectors caused the currency to lose its value. And how then continually printing more currency over the years for all sorts of needs without linking it to to increased economic productivity simply devalued the Zim dollar even further. That inflation has now reached the unprecedented, unfathomable level of millions of percent!

In normal times we would expect Gono’s RBZ to control inflation by adjusting the quantities of currency in circulation and putting in place various monetary policy measures to try to control production and spending in one direction or another. But Zimbabwe’s inflation situation has gone way beyond the ability of the central bank to do that.

The currency is not going to be suddenly stabilised and then strengthened by increased economic activity. There is absolutely no reason to believe there is going to be any sudden increase in earnings from agriculture, tourism, mining or manufacturing in the short term. Foreign credit that would also help to artificially shore up the Zim dollar is no longer available to the country in any meaningful amounts.

Given these basics, there seems no other realistic currency/inflation-stabilising pressure to look forward to other than a large hard-currency injection of some sort. And that is impossible to imagine in the absence of an implemented political settlement between Robert Mugabe’s MDC and Morgan Tsvangirai’s MDC. Even with it, there is no guarantee that aid and loans would come in the quantities required and soon enough to lower inflation to the levels pertaining in the rest of the world in a hurry.

Obviously Gono and the RBZ have no influence on the successful  implementation of power-sharing between ZANU-PF and the MDC. And not only does the RBZ no longer have the ability to control inflation by controlling money supply, the hyper-inflationary pressures have forced it to do the exact opposite: print cash like crazy so that the public can try to keep up with prices that escalate by the minute, but in the process further “fuelling” hyper-inflation.

Gono is criticised by economists for worsening inflation by churning out more currency every week despite falling production, making the currency ever more worthless. But if he tried to “rein in” inflation by reducing circulating currency, there would be an outcry from the public who would not be able to access the amounts of currency required to keep up with skyrocketing prices. What you need a bag of cash for this week you may need a suitcase’s worth next week.   It is hardly surprising that after years of this  situation that simply could not continue indefinitely, foreign currencies like the US dollar, South African rand and Botswana pula have become the preferred media of change, causing other problems.

Mr. Gono is on a treadmill and cannot get off: he is fully aware of these inter-linked imperatives of a capitalist economy like Zimbabwe’s, but he is in a position where he simply has no choice but to try to reconcile the un-reconcilable. The effect is that all his efforts are to merely run around in endless circles. Only a political settlement and emergency external hard-currency injection of some sort can now break the circle enough to eventually make it possible for him to eventually play a traditional central banker role in any positive, meaningful way.

Three days ago Gono released the country’s first ever $100 million note to try to reduce the daily bank queues as people struggle to withdraw amounts of currency sufficient to keep up with galloping prices (not just of goods, but of the forex that is now very necessary to buy all sorts of goods and services at all). The system struggles and fails to keep enough of that currency because of the extent of the hyper-inflation, and despite the currency printing presses working overtime to keep pace. And it is  necessary to print currency of ever outrageously higher numerical value. It has already been announced that next week a $200 million note will be released. A billion dollar note cannot be far into the future at this rate, but this can’t go on forever, or even for very much longer.

So Gono releases trillions of Zim-dollars’ worth of his new $100 million note to the banks the day before it is to become legal tender. The next day he has a temper tantrum against some of these banks for releasing the notes into circulation a few hours before they technically became official currency. Gono goes to town, accusing the banks of being responsible for many of the sins for which he and the RBZ are often blamed, such as buying foreign currency from the street, making nonsense of the official exchange rate(s).

All of Mr. Gono’s many pent-up frustrations seemed to find an outlet on the discovery of this infraction by the banks. We are told of how the managers at several banks “have been relieved of their duties after vast sums in new notes issued to them by the Reserve Bank of Zimbabwe found their way onto the illegal parallel market on Wednesday evening (i.e. night of release to the banks by the RBZ and eve of becoming official tender). Several top bankers found themselves “banned” from their profession for five years.

Gono makes  a very big deal about the notes hitting the streets a few hours “early.” He insinuates that this is proof that the banks have a big role to play in ‘economic sabotage’ activities like driving the ‘illegal’ foreign currency market.

“We are sick and tired of being labelled crooks,” said Gono in regards to himself and the RBZ (said to be the biggest buyer of ‘illegal’  forex, not an unreasonable suspicion given that none is easily available ‘legally.’) His over-dramatic out-burst seemed designed to say to the public and what he as called his ‘principals, ‘ “Aha, you see? You have been accusing/suspecting me of being the bad guy all along, but here are the real culprits; we have caught them red-handed, I have been innocent all along.”

Technically and legally Gono has a point about the impropriety of the notes being released a few hours before they should have been. But the technical, legal correctness of his position has been far superceded by the economic realities. In the circumstances, it is petty in the extreme of Gono to make a big deal about this.

The banks acted exactly as you would expect based on the economic survival imperatives that have come to over-rule any law in the Zimbabwe of today. It is now overwhelmingly about survival, not a relatively little thing like legality. The “early” release of the notes, whether to buyso-called  illegal foreign currency or to just pay account holders writing cheques, was simply to try to use the currency before it lost a big chunk of its value, which it is doing by the millisecond. A deal negotiated the afternoon of the RBZ’s release of the new note to the banks, but only paid for the next morning when the note was legal would have been worth considerably less for the cash recipient. That is how fast the currency is losing its value.

So yes, banks that are supposed to be outstanding upholders of propriety can be accused of acting willfully illegally in this case, but my point is that the overall economic environment is such that this is a petty point: almost everybody is always technically flouting one law or another in the course of just trying to stay one tiny step ahead of hyper-inflation and all the other things that have gone wrong in the economy.

So the banks may have acted technically illegally, but they behaved entirely rationally for the situation. It is fooling no one for Gono to mainly focus on what in the circumstances is the really minor ecnicallegal, legal point of the ‘early’ release of the new notes.

Far more important are the bigger, more significant factors that account for that behaviour being entirely expected and rational in the present situation. Unless and until those factors are dealt with by Gono’s principals, then his little temper tantrum was simply an irrelevance of a side-show. Banks, their clients and everyone else will keep trying to find ways, legal or otherwise, in the ultimately futile exercise of trying to avoid, reduce  or delay the effects of hyper-inflation.

Gono famously said “failure is not an option” in regards to lowering inflation when he began his first RBZ term with much fanfare five years ago. What Gono’s little performance in regards to the release of the latest note shows is that for now, failure is a reality, and not necessarily for reasons within his control.

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