Zimbabwe’s man-made financial crises and the impending implosion of a system that has become fragile, reckless, and distorted

-



Zimbabwean politicians and regulators have settled for unfocused and poorly designed steps to create a better financial system.  It should be noted that policy makers who repeatedly fail to protect the public are not accountable. The introduction of bond notes is a result of willful blindness on the part of politicians and regulators in Zimbabwe. The very people who should be protecting the public from financial crises are the ones perpetrating measures that create the very chaos regulators should be predicting and preventing. The banking crises of 2003-2004 where a lot of banks were closed and some went under curator-ship was repeated again in 2012-2013. It seems the regulators and the policy makers did not learn anything from the first banking crisis. When Gideon Gono assumed office as governor of the central bank in December 2003 inflation was 622,8% in January 2004, the financial crisis which followed until 2008 was all man-made. Whilst it was possible to adopt policies that would have reduced inflation the central bank chose policies that skyrocketed inflation to break the world records.  



Financial crises such as the prevailing liquidity crisis, the hyper-inflation and the banking crisis are not natural disasters they are man-made disasters. The chaos which was to come because of the treasury bills, an RTGS system without cash to back it and the introduction of bond notes was very easy to predict, it was indeed clear but the central bank chose to adopt those measures and the new ‘currency’. Liquidity problems, panics and runs do not just happen in an economy they are triggered by fear and uncertainty regarding the future of the economy in Zimbabwe. The country will hold elections next year which also mean the period before elections investors will be uncertain and this will compound liquidity problems further.

The central bank is running a real time gross settlement system without cash to support the balances a situation which is not new with the Reserve Bank of Zimbabwe, that was the very same scenario during the hyper-inflation era. Through the issuing of treasury bills the central bank created the scenario in other words it was the central bank which was involved in wiping out liquidity in the market. Bond notes was only an afterthought to try and introduce liquidity into the market however its effect is only compounding the problem. The central bank can only buy back treasury bills through RTGS with no cash to support it and partly through the printing of bond notes. The introduction of 300 million worth of new bond notes means Zimbabwe is heading towards dedollarisation, will this succeed? I have already written about this here https://shamemugova.blogspot.co.za/2017/01/will-zimbabwes-dedollarization-efforts.html.



Financial crisis can be predicted though it’s not easy to predict the exact timing, the current reckless practices by RBZ, the danger warning signs in the market is pointing to a serious crisis. The bond note has already lost as much as 50% on the black market and the shortages of foreign currency keep getting worse. The central bank’s role and concern should be maintaining financial stability and assuring it however this has never been the case in Zimbabwe. The president said, “Bond notes are a temporary thing. We want you to bear with us. We wanted to adopt them for a short period.” However, the bond notes were not given a short period such as twelve months, which they would operate and get demonetized. If bond notes were meant to be for a short period, they were supposed to be demonetized within a period of twelve months any period beyond one year is referred to as long term in finance. We need consumers of the financial systems who know their rights and are better informed about financial issues. The central bank through its governor Dr John Mangudya gives fallacies and confusing narratives to the public in order to maintain their willful blindness and get away with failing to protect the public properly.




Comments

Post a Comment

Popular posts from this blog

Understanding Zimbabwe’s budget deficits, government debt and economic effects

-
The policy that ‘we eat what we kill’ was made popular in Zimbabwe during the Global Political Agreement period when Tendai Biti was the Minister of Finance. This is a principle advocated for by balanced-budget proponents. On the contrary governments also run budget deficits I have dedicated this article to explain the concept of budget deficits. A budget deficit the amount by which public spending exceeds revenue over a particular period of time. The Zimbabwean government is currently running budget deficits. The harmful effects of running budget deficits include; crowding out of the private sector, high real rates of interest, low national savings, low economic growth rates, large current account deficits and inflation, among others. John Maynard Keynes holds that in times of severe economic shriveling in the private economy, it is tolerable for the government to go into debt and increase spending to compensate for the fall in consumer and other private sector expendit
Read more

Public financial transparency and accountability of government revenues and expenditures in Zimbabwe

-
Zimbabweans are familiar with budget statement presented by the Minister of Finance in the parliament every year but unfortunately the public has never received detailed financial statements after expenditure. Zimbabweans usually know the amount which is allocated to certain ministries such as health, education social welfare but the public has never received financial reports detailing how the money was used. The lack of financial reporting means that the public has no information to make the government accountable. Accountability has been viewed since time immemorial as a channel for ascertaining the use of power by an individual or an organization that has been entrusted with the task of performing prescribed tasks (Premchand 1999).  Kautilya wrote a manual on bureaucracy before the Christian age, he observed that human nature was disposed to acquire public money for private gain. He wrote: “Just as it is impossible not to taste honey or poison that one may find at the tip of o
Read more

Should Zimbabwe adopt the Rand as official currency?

-
Image
Follow @ExpBusinessSA Dollarization is a situation where a country uses another currency officially or unofficially as legal tender. There are greater economic benefits to be realised by going for full official dollarization compared to semi-official or unofficial dollarization. Dollarization does not always involve the US dollar as the adopted currency, the euro can be adopted by non-EU members in the same way Zimbabwe can adopt the South African Rand through full official Randrisation. Official dollarization requires to surrender monetary policy to another country and often a country loses seigniorage and an independent monetary policy. If Zimbabwe chooses dollarization by adopting full official randrisation, the country will still export and earn US dollars and use the same US dollars for imports and international obligations. The only difference is that the rand will be the predominant or exclusive legal tender for local transactions. The official randrisation discussed here
Read more