What money creation does is to immediately improve aggregate demand. So in recent months Zimbabwe experienced a resurge in demand with all companies recording insane revenue growth rates which were money supply fuelled (as shown by figure 1 at the bottom). This was further buttressed by industry protectionism. When demand rises, production also responds, capacity ramps up implying increased demand for inputs. The challenge now becomes how to source inputs if they do have a foreign component. Across industry the issue of sourcing raw materials became a serious challenge.

These bottlenecks meant either resorting to parallel market for forex at a premium for SMEs or, for big companies it meant waiting in the forex queue for allocation. Some lags became more pronounced in line with market disequilibrium whereas the highly unregulated informal market relied on the parallel market for forex to import goods either for resell or use in production. These exchange rates were then to be factored in pricing of products as reflected by the 3 tier pricing model. Because the RTGS was awash demand remained high and consumers were willing to pay a higher price resulting in inflationary pressures. So this became a nuanced crisis fuelled by money supply growth and ignited by deficit financing.

Could this have been stopped? It begs the question, but clearly as is the case with most governments the choices are difficult. A look at the country’s budget deficit trend shows discipline during the GNU period and a gradual worsening from 2014 onwards. So these budget deficits were, as explained earlier being financed by TBs which was bad, but on the other hand we are having a trade deficit which was growing wider during the GNU.

On the external trade side we were having an average trade deficit of -$3.3 billion per year and in just 3 years we pushed out $10 billion in hard currency. During that period, the USD was very strong relative regional currencies and that meant loss of export competitiveness, which dragged local production and potential GDP growth. The region also aggressively pushed its product on Zim even at a loss only to get hold of the USD whose converted value in local currency would come out superior. The trade imbalance was however not a big loss to the economy, since we were fully dollarized. In trade the immediate loss is typically in local currency value depletion against peer, notably those that it trades with the most, if the current account is in sustained deficit.

So in the case of Zimbabwe whereas we were supposed to have a currency value loss due to trade imbalance, our derived currency the USD, which is used as a reserve currency world over proved to be very strong. The net effect was a much more stable economy although cheap regional goods deflated the local economy which was not good for the economic growth, but condusive for stability.

Broadly there has been contestation over the impact of demand inducement through money supply. Government together with the RBZ says the positives far outweigh the negatives meaning that it did achieve the intended the goals and that the negatives are manageable. It cites growth in production in a number of sectors as a key metric particulary on the export side. RBZ believes the export incentive has delivered good results while government believes the economic growth rates attained in recent months are attributed to its efforts through budgetary support.

On the outset we believe these observations are not as sincere and that negatives far outweigh the positives implying we are in a worse off position. We are more worried about the quality of growth being realized. The prevailing sharp growth rates are a culmination of money supply growth which has increased spend across the economy & this money supply growth has widened the gap in actual money supply to real cash in the economy and naturally resulting in a discount for the RTGS money. So whatever growth is realized if normalized it becomes even smaller or even negative factoring the parallel market exchange rates.

Where to from here? There is a clear disintegration of the monetary system which by all measures appears insurmountable in the very short term. There is no quick fix to the crisis Zimbabwe faces and clearly we are not in a growth phase, the adjusted returns or growth are negative in our view. Suppose the monetary system collapses today, a lot of balance sheets will have to be adjusted for the loss of value and that clearly is the point. If on the other hand government opt to devalue the local equivalents, balance sheets or envisaged growth will also have to be discounted by an equal margin. Government has a chance to partially float the exchange rate and debunk bond notes, protect the remaining value of the discounted RTGS in the system. This knock will be costly to everyone but important for confidence building, stabilising the fx markets and save the little forex in government coffers through reduced costly external stabilization facilities.

The other option will be to completely redollarise, wipe out all RTGS in the books taking us back to 2008. This is a huge knock to the economy, it means going back to a very low base and folding of many companies mainly SMEs whose risk is largely concentrated in cash. But on the hand, it means the monetary equilibrium is restored. The government at this point would only need to worry about fiscal consolidation. If the measures prescribed in the TSP are followed, sustainable growth can be achieved in a few years.

Government is however not likely to follow all the options stated above. There is going to be a defiance, living to fight one more day in defense of the rejected local money equivalents.  This despite the huge cost attached to it through sustained discounting of imports and further import pressure through over supply of RTGS. The end is nigh and it is only a matter of when before the full unraveling. Recent patterns in stock market trading, stampede in retail spend are not signs of panic but realistic reactions to a crumbling monetary system.