Monday, February 23, 2009

Zimbabwe: Dollarisation - We All Need to Adjust

23 February 2009
Harare — ZIMBABWEANS need entirely new attitudes to pay, to pricing, to spending, to taxing, to regulating and to saving following the final dollarisation of the economy for all practical purposes over the last fortnight.
For a decade, Zimbabweans have become used to prices rising at ever accelerating rates, to pay racing ahead, to having to price goods and services at what is assumed to be next month's replacement price, with spending money as it comes in and learning how to "burn" money by arbitraging between exchange rates.
At the same time, a huge "dealer" economy arose.
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This was totally unproductive, often illegal, and fairly often corrupt. But it allowed a significant minority to ameliorate the effects of ever rising hyperinflation, although most were driven ever deeper into poverty as wealth was transferred to that minority.
As monthly inflation rose over 100 percent, tax collections, falling behind all the time, became ever more meaningless since they were collected at least a month in arrears, so accelerating the need to "print" money to fund the Government.
At the same time, the productive sector was hard hit, unable to source inputs and forced to pay what amounted to steep export taxes as a rational and reasonable system of managing export earnings became an intolerable burden.
Even when rents, goods and services were charged in hard currency, usually illegally, these prices had little relation to actual value and were usually based on what those near the apex of the "dealer" economy could afford.
All that has quite suddenly ended, and ended forever.
And for almost all Zimbabweans and for the Government, this means starting at the bottom.
The whole pricing structure has changed.
Prices for food and groceries are now falling as competition enters the market in a big way and local manufacturers come back into production. There is no longer a supply-side shortage, rather a shortage of cash in customers' wallets.
The unrealistic US dollar rents charged by the end of last year are starting to leave flats, houses and office suites empty, since people simply do not have the money and can no longer extend their earnings by manipulations. We expect rents to start falling as market forces force landlords to rethink.
But where goods or services are in short supply, unrealistic prices still pertain. Medical costs are still so high that it is cheaper to fly a patient to a South African private hospital than use a Zimbabwean private hospital.
Hardware stores are still learning. Some have started to slash prices, but it is still possible to find a US$4 plug in a shop next door to a shop where the same plug is being sold for US$1.
Pay negotiations have started, with some quite unrealistic demands in some sectors. It is now impossible to "print" money and very difficult to borrow. Every employer, from the Government and the titans of industry down to the little shop, can only afford to pay what they have earned or collected in hard cash.
Other countries have found when restarting their economies that fairly flat pay scales are the only way out when pay has to be low. In other words, the chief executive earns only a modest multiple of the pay of the man who makes his tea. Fairness can at least make poor pay less unacceptable and encourages management and workers to think seriously of ways to boost profits so all can have reasonable pay rises as the economy or business grows.
Both the Reserve Bank of Zimbabwe and the Government need to look again at the last proposed budget and monetary policy statement in light of the changes of the last couple of weeks, changes they themselves initiated with those proposals and policies, since some measures have been overtaken by events.
The RBZ must easily hold the world record for the number of years it kept large chunks of the economy going with high hyperinflation and managed liberalisation of the economy fairly smoothly over the last few months.
But now the stage has been reached where licensing of ordinary business is a tax, rather than a banking operation, and needs to be transferred to local government and Government. The rule of no taxation without representation still applies.
At the same time, the collapse of the dealer economy is probably going to put impossible strains on some banks, and that will need to be managed if the ordinary Zimbabwean is not to be hit unfairly.
Someone is going to have to manage the national debt and create the savings instruments that we all need.
For banking, too, must now change. Banks are still trying to live on high fee income for their foreign currency accounts instead of working out savings schemes so that they can go back into traditional banking and lend mobilised savings.
The Government needs to ensure that taxes are fair, are collected promptly so it can pay its bills and salaries, and encourage rather than inhibit economic growth.
Zimbabwe has entered a new era. We all, from Government through investor and business owner to the ordinary person, need to adjust.

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