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weakening of the economies in SADC

Hi out there.

I have been a little predisposed to trying to force my little business survive in what is an increasingly hostile business environment. The hostility has largely been driven by weakening economies across the SADC region. it is estimated that a number of economies will produce less than impressive GDP results this year. Zimbabwe will probably do the worst with our GDP expected to end the year at 29 billion from 31 billion in 2018 (* source Tradingeconomics.com).

Looking at the indicators across the region, all is not well. In Zimbabwe what is obvious is the ones who are running the show have returned to money printing which is running at odds with the tight fiscal policy that has been alluded to by our minister of finance in his transitional stabilization programme. In actual fact the resolve of the government has been found wanting as they have seen overtures rebuffed in their diplomatic engagement drive.

The leadership in Zimbabwe has largely spurned the goodwill that they have received , both locally and abroad since taking over. The execution of larger deals has been hesitant and uninspiring. Key projects that should have been hallmarks of their development programmes have been chased by the confusion reigning on the economic policy front. 

Problem 1: the war between economic institutions

Economic liberalism has never been a policy favoured by ZANU PF. Many of the leadership had their ideology developed in communist capitals such as Bejing and Moscow. There many of our leadership observed the two different models of centrally planned economies. The inefficency and corruption that our planning methods implementation of plans have created in Zimbabwe are largely because of Zanu pf's carrot and stick use of state resources to ensure loyalty from cadres in the face of sanctions. And secondly due to the shortage of credit needed to fund the requisite reform agenda.

So to generalise there are two economic groupings fighting for policy dominance in Zimbabwe. There are the reformists (who believe in economic liberalisation) as the key to driving zim forward - these are led by Mthuli Ncube and Guvamatanga at Ministry of finance; and the hawks (who argue against the reform agenda without the needed funding and removal of sanctions) led by Mangudya and the Reserve bank. 

Between these two institutions there continues to be deep rooted conflict which reduces public confidence as they continue to contradict each other with the appointing authority giving the go ahead as each policy seems to go against previous pronouncements. we shall analyse these conflicts with an example. In february 2019 the Ministry of finance to the bold step to reverse the policy of holding the bond note (fiat currency created by RBZ) at par to the USD. The one to one policy was creating untold capital erosion in the banking sector as intsitutions were being looted by staff and market exposures where US dollars were being replaced by the fiat currency and creating enormous arbitrage opportunities.    

The result of the policy has been capital flight from the bond markets and reduction in investment in production. It did lead to attempts to store value in property and equities. so the Bull run that the equities market saw was not as a result of growth indicators and performance, but of capital trying to find a hedge from the on going storm that these policy flip flopping was creating.

The austerity alluded to by the 2019 budget was soon undone as RBZ printed money through transfer balances to meet USD purchase requirements. while this is standard practice by central banks to create liquidity on the trading markets, Open MArket operations are often sterilised from creating inflation by taking the mopped funds off the market and only returning the funds once there is a corespondent increase in production or to stabilise shocks. What the RBZ did was appalling they bought USD from the market by creating 4 billion RTGS to meet the USD purchase requirements of the market. Instead of selling the USD to the market at a profit (thereby reducing RTGS on the market), they gave the subsidised forex to the market at less than the purchase price. This quickly has led to inflation. The year on year inflation rate galloped to 175.6% in June. we can only guess the the rate now (estmated at anything between 200 percent and 800) in October 2019. 

This has all been happening in the midst of corporate closures, slowing sales and wage compresion as government and private sector attempt to keep a lid recurrent expenses. This also, has led to untold suffering as the average Zimbabwean has lost savings (second time in a decade) and most companies have eroded their Balance sheets. the policy flip flopping has also destroyed capital and held up much needed FDI. 

Recomendations
  
The appointing authority has to take over the policy debate and set the direction and tone of the economic policy. The decision he takes has to be swift and aggressive as even our fair whether friends (chinese) are growing weary of the continuous self sabotaging we continue to follow. IF the reform path is to be taken, the entire top management of the central bank (including Directors and Head Of Departments) must be culled. A new leadership has to be introduced to follow the mandate of the Central bank under the RBZ act. They are the lead agency in defending the local currency and fighting against inflation. On both counts they have failed dismally. 

Economic growth cannot be attained without policy certainty and currency stability. The current shocks have led many businesses to abandon the local currency. The reaction by the RBZ by banning free use of Nostro funds and attempting to cripple the mobile money platforms are only a result of poor monetary discipline. Market reaction to Monetary indiscipline after hyperinflation is swift and exaggerated as panic of a repeat episode have set in. speculation just increases economic damage.

Legislating more controls will have the opposite effect of the intentions as most companies and independent entities begin to plan against the risk of value loss. Government need to do the following in my opinion within the next 6 months to prevent the total collapse of the economy:
1. Get one of the mega deal touted operational such as the DIDG NRZ deal. it will bring some sort of confidence in the competence of our gvt to get things done.
2. Removal and replacement of RBZ board with competent and reputable leaders untouched by the quasi fiscal in discipline of Gononomics and Mangudya era. The governor misled the public on the bond note and he will always be tainted by that piece of short term economic thinking.
3. return of transparent measures of economic progress. ie quarterly GDP growth stats and Year on Year inflation Stats. by Hiding information, more biased measures will be used in their stead i.e. the Hanke measure of inflation of Zimbabwe or the Old Mutual Implied exchange rate.
4. Review of value preservation in the reform process. work has to be done on stabilisation of value. Wage value, currency value and pricing stability. In theory, currency should not depreciate if positive interest rates are in place, money supply growth is contained and cost control is enacted. this will bring capital back into the market... but government has to be patient.
5. A more sustainable funding model to Agriculture. Comand funding model is not working. risk and reward has to returned into agriculture to ensure the sustainabilty of food supply. 

There level of detail in effecting a turn around programme to the economy will require a number more steps. but the above five will be critical in creating confidence to bring the market back onside to support their planning going forward. we will discuss the further steps to get to promised lad in subsequent postings. To all Zimbos out there please note... It will take a generation of hard work and productivity to bring Zim to where it should be. this wont be for the feint hearted.

Till next time!

   

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