Are these signs of a crumbling system?


    A number of overtures have been spun by government over the last 4 weeks in a failed attempt to paint a bright picture of the economy. The ministry of finance has gone into overdrive trying in vain to contain the unraveling economic crisis which shifted gears to a higher level following the announcement of contractionary fiscal and monetary measures that were met with both resistance and unexpected adjustments by the market. Monetary measures such as the separation of nostros between the RTGS and USD have also been met with harsh responses from the black market which has since then climbed up at an astronomic rate, while some companies have restricted their pricings to USD only. It is critical to note that in all instances what has given the market strength to respond and success thereof, is a weaker underlying economy with loopholes for manipulation or allowance for retaliation, having been manipulated in the first instance by government itself as I will show in later passages.

    The latest attempt at containing the crisis is the announcement of an uninspiring communication committee at the Finance ministry, created to manage information dissemination and spin. But, is communication the real challenge facing the ministry and the economy? At least the President and his cabinet wrongly believes in this symptomatic approach to problems. His weekly features focusing on the economy which are being published by Sunday Mail and now running for the second consecutive week attest to this misplaced belief. There is nothing really in these narratives except for playing of the blame game and apportionment of same on third forces be it in product pricing or forex dealing. The plan according to ED is to arrest perpetrators of these manipulations and not to unrest the forex crisis, pathetic. If anything no one, since the “dispensation”, has been incarcerated for serious offences such as money laundering and corruption, just mere talk show.

    The government speaks like a victim suffering from sabotages and deliberate manipulations which they want to believe are having a distortive effect on the market. They do not want to believe it is of their own making. Of particular interest is the USD parallel market which is presently heavily discounting local payment equivalents.  Authorities with the support of hopefuls in business and apologists alike have spoken out against speculative buying of commodities, charging that it has a distortive effect through supply shocks. While the outcome is true, the motive of those who hoard in my view is very rationale. Anticipating a crisis or creating one can only be achieved if the market on its own is readily weak and cannot absorb shocks. If one knows that continuous hoarding of a commodity such as cooking oil will result in running out of stocks, pursues that path and gradually achieves outdoing supply, it means prices will eventually adjust upwards so as to equilibrate.

    This is clearly how a market economy should operate like. It is not for the buyer to deal with morality concerns or help cushion the excesses created by government or supplier, unless moral suasion is pursued in its entirety. It is government’s business to create an enabling stable macro environment which includes currency stability as a key tenet so as to maintain equilibrium. In the absence of currency stability and presence of USD manipulation through a fixed exchange rate regime as the government is doing right now, the market fluctuates accordingly. Those positioned are entitled to take advantage. How is government creating a distortion? By sustainably holding that the USD is at par with the Bond and RTGS it means government has to return dollar in RTGS for dollar in US, on demand.

    Now the challenge is that government has allowed RTGS to grow astronomically while not growing the same monetary base in terms of M1 (notes and coins) notably US dollar balances. The variance between the two means as and when depositors demand hard cash for settlement of import stock and or other service payments, from their “at par” balances, that money would not be readily available. Keeping a stable base of broad money supply in line with real hard cash would have meant a slower economic growth and attendant slower growth in company earnings and individuals’ income. Demand for goods and services would have remained stable and growing at a slower but managed rate. This stable aggregate demand would have also resulted in steady demand for forex to suit foreign import payments. It would have solved 2 things at once, one being equilibrium value through low RTGS supply and lower aggregate demand, in turn a lower demand for USD.

    But alas money supply grew sharply as government funded all sorts of quasi fiscal activities using borrowings from open market operations, in deficit financing. Now that the variance between the 2 has widened, maintaining the fallacy that the RTGS whose balances are sitting at above $10 billion is the same as USD whose balance is about $300 million is not only difficult and absurd, but distortive and very costly. That forex is used for purchases of imports and that imports historically outrun exports, means a breaking point is unavoidable. No amount of exports growth can effectively cover up for the present trade deficit gap in the short term. To keep these 2 trade variables low would have demanded that government contains local aggregate demand through restraining money supply.

    Now there is a crisis in terms of forex shortages as government fails to match the import demand with real dollars taking this from the $10 billion RTGS or usable balances of circa $3 billion RTGS. To cover the import demand gap either means government gets more import stabilization facilities or participates on the parallel market for the few USD balances. Beyond these 2 there is no other way out. As government continues to resist liberalizing the exchange rate, the market reads that the former is now subsidizing key imports, such as Fuel and Cooking Oil, and likewise takes advantage. Subsidizing means government is covering part of the imported goods’ costs which in essence should have been incurred by the importer after they buy dollars at a floating exchange rate. Rationale consumers understand that this discrepancy cannot be sustainably maintained and so they take market positions such as hoarding or arbitrage.

    For example, consumers are buying a 2 litre cooking oil bottle in bond/RTGS prices of $4. They take the commodity into nearby regional countries and sell a unit for as low as USD$2 which they exchange on the local parallel market for between 1:3 or 4.5 in favour of USD. The gain is between $2 RTGS and $3.5 RTGS per unit depending on the exchange rate, same goes for fuel. Others are opting for stocking in anticipation of stock-outs and future sales of cooking oil at exorbitant prices such as the recent $12 to $15 prices.

    The problem of indirect subsidy creates artificial calm in the market and the broader populace is simply betting against that. The people understand that government cannot sustainably maintain that deceit into the forseeable future. The market wants the surrogate currency to go and a complete re-dollarisation. I want to believe government appreciates this view and market position but however found itself in a catch 22 situation between a rock and a hard place. On the other hand there is pressure to preserve value of deposits and savings and avoid another 2009, but since there is no ready means to cover for the huge gap between USD hard cash and RTGS balances created by the swelling money balance in the economy, the government chooses to clutch on a straw and only affords to buy time through further subsidising at a cost of stabilization facilities interest payment.

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