Reserve Bank November 20 2008 Press Statement:

Comments and Observations - by John Robertson

The Reserve Bank Governor’s continued reluctance to admit that market distortions are likely to cause other market distortions appears to be behind his latest intemperate attack on the business sector. To him, the only acceptable explanations for anything are those that ensure that all the blame is placed somewhere other than on the Reserve Bank or the government.
The Governor’s latest efforts start with condemnations of media campaigns that have tried to vilify the Reserve Bank, and of smear campaigns that have argued that he is personally to blame for Zimbabwe’s current hardships. However, his entire defence is to argue that the “facts clearly demonstrate how the Zimbabwe Stock Exchange had become the epicentre of economic destruction”. If the Governor’s more colourful words are removed, the facts presented are:

Ø The ZSE allowed some stockbrokers to bid up share prices, although they had no money to pay for them;
Ø The profits made on selling the shares show up as high demand for cash that is beyond the Reserve Bank’s ability to meet;
Ø The Stock Exchange was deliberately indexing the entire stock market to movements in Old Mutual share prices;
Ø Share prices have frequently risen steeply even though none were traded.
Ø Old Mutual share price movements have shown no relationship with the company’s performance or conditions in the economy.
Dr Gono presents these facts as accusations of professional misconduct, but most of them are no more than descriptions of normal market activity. The circumstances in the market itself are far from normal, but the Governor’s only comments on that subject are intended to deflect the blame for all distortions onto others.
Stockbrokers are usually acting on behalf of their clients, but whether their buying or selling orders are for their clients or for themselves, the buyers want what they have paid for and the sellers want to be paid. Buyers and sellers work through the stock exchange, which is simply a market through which deals are arranged and completed under rules designed to ensure that transactions are carried out efficiently. What buyers, sellers and stockbrokers might get up to is not the market’s responsibility.
This makes the claim that this market has become the “epicentre of economic destruction” absurd. Trying to buy something that can be sold later at a profit is entirely normal conduct. If this profit becomes large because of the scarcities of goods in the market and/or the scarcities of the foreign currency needed to import them, the resulting price increases are not the fault of the market, or the buyers or the sellers.
But buyers do have to work within the law: writing a cheque for an amount in excess of the balance in a buyer’s bank account is illegal. In terms of the law, such a buyer becomes answerable to the seller, possibly through the courts.
Sometimes the buyers’ or sellers’ conduct is chosen to reduce risks or to prevent outright losses and yes, it is sometimes designed to extract the best possible profits. If good profit prospects are then exaggerated by the Reserve Bank choosing to add enormously to the Zimbabwe dollars that can be spent, the fault does not lie with those who make the profit.
The fault lies entirely on the shoulders of those who created the scarcities, anomalies and distortions in the first place. These powerful forces so directly determine the conduct of buyers and sellers that any policy choices that do not effectively deal with them will be no solution at all.
Scarcities account for most of the problems. For goods that used to be in reasonably good supply, the reasons for each and every scarcity can be traced back to some government policy decision. The loss of Zimbabwe’s large-scale farming companies caused reduced supplies of food as well as most non-food agricultural commodities, and their lower production caused lower deliveries to the manufacturers and retailers, lower foreign earnings, lower employment, lower investment levels and lower tax revenues for government.
Falling export revenues did not only mean that Zimbabwe could afford fewer imports. The country also could not afford to settle outstanding debt. Potential lenders were quick to decide Zimbabwe could not be trusted to settle new debts, and when the Zimbabwe government decided to cancel certain property rights and to break the collateral link between farmers and banks within Zimbabwe, the moves reinforced the external financiers’ decisions to keep their distance.
Several other linkages can be identified. When policy decisions caused confidence to fall, the Zimbabwe dollar fell too, prompting government to fix the exchange rate. At the fixed exchange rate, mining and manufacturing exports became less profitable, so a whole new rash of falls affected employment, investment and tax revenues.
And when government’s rising borrowings to make up for declining tax inflows became too expensive because of the rising rates of interest, government set interest rates so low that savings were effectively confiscated. As savings disappeared, investment fell even further, forcing the emigration of those looking for work and of many who had jobs, but saw little future.
Just about every identifiable problem today can be shown to have their origins in dubious policy choices. This remains true whether the challenge is to account for electricity and water cuts, or the loss of nurses, teachers, doctors, engineers and accountants, or the loss of access to lines of credit from international banks or the loss of stand-by facilities from international development agencies.
Price controls, justified by false claims against traders and enforced by political violence, must be added to the picture, along with other forms of intimidation that were intended to generate compliance and obedience.
By carefully redefining the word “sanctions” to include every risk-avoiding decision taken by every individual, government or agency that has chosen not to endorse economically damaging or unjust policies, Dr Gono has tried to shift the blame onto anyone who dares to disrespect the sovereign status of the country and the sovereign rights of its leaders.
Until a few days ago, that line seemed still to be working. SADC parroted the cries for the removal of sanctions, the Pan-African Parliament passed a resolution to the same effect, the impartial mediator in the power-sharing negotiations, Thabo Mbeki, followed the same line and the African Union was also persuaded that the lifting of sanctions would result in Zimbabwe’s economic turn-around.
But this week, the scene has changed. At home, the Zimbabwe currency has become almost worthless, banks have been marginalised, production in every sector has fallen to unsustainable levels, useful wages cannot be paid and services are collapsing. Disease outbreaks are threatening thousands and Zimbabwe is at last being seen as a threat to regional stability.
Regional leaders are losing patience and support for Robert Mugabe is being far less readily offered. The major change has followed upon his displays of arrogance and contempt for important people who have been trying to help. The major effect so far has been a far greater concentration of criticism than ever before.
As news of government’s plans to strip the remaining resources out of the pension funds becomes more widely known, as the need for alternatives to Zimbabwe dollars turns into a threat to the welfare of millions of Zimbabweans, as the efforts made to stifle activity on the stock exchange gather momentum and as food supplies dwindle, the sheer impossibility of the situation continuing will begin to develop its own dynamic.
At this stage, the re-appointment of Dr Gono as Reserve Bank Governor for a second five-year term does not seem likely to make a difference. In his latest statement he re-confirms his conviction that sanctions are the cause of every one of the problems, so none of the measures needed to rebuild Zimbabwe’s capacity to produce, earn, export, attract investment or generate tax revenues are yet being addressed.
Political, rather than economic policy changes are needed to make a breakthrough. Hopefully the pressures will soon reach the levels needed to bring about the necessary changes.

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John Robertson
November 26 2008