‘Govt Failure Creates Market Inefficiencies’

Government’s intervention in the economy has failed to improve market performance as its policy measures   have not arrested unrelenting  inflation, haemorrhage exchange rate and currency volatilities, which are ravaging the economy.

The observation was made by multiple economists and captains of industry who spoke to Business Times.

The economic inefficiency, which resulted in significant decline in economic welfare, has also resulted in prices of goods going through the roof, meaning industry is now battling excessive costs of production.

The administration, however, justified its intervention measures saying it was solving market failures.

But economists said this created more problems for the economy describing it as a government ‘failure’.

“The government failed to implement the rules of the Dutch Auction System which is opposed to the one they are using. They have flouted the laws and principles of the real auction system by not advising the public how much money was going to be put under the hammer,” economist Gift Mugano told Business Times  this week.

“They are not taking the highest bidder as the first price but they are using the average price which discourages high bids and inhibits the auction from converging with the parallel market.

The delays in the disbursement of foreign currency to the companies discredit the auction   system as a credible source of forex leaving the black market as an alternative and the real market where the highest bidder takes the amount one needs.”

Mugano said this resulted in a spike of the exchange rate, inflation and causing shortages in the shops due to inefficiency of the auction system.

He said the government scored “own goal” after it scrapped duty on   basic goods  imported into the country.

Mugano said  the  policy will do more harm than good as local industry will be left to collapse.

“The treasury has failed through its poor national financing system where it uses short term financing to finance projects, you can’t do that. This is equivalent to pumping the money into the black market as once you pay the contractors they would want to preserve value hence they will buy forex using exorbitant rates,” he said.

“Also the agriculture funding is wrong as it involves subsidies thereby causing distortions and this has relegated the players in the value chain as spectators since it is difficult to go into cotton production  as an example to contract farmers when the same farmers are getting free inputs,” Mugano said.

“They disabled the market functioning system  and in the same vein they have pumped more money into the market. We are talking of ZWL$450bn, utilised from agriculture and construction. I can tell that by the end of the year they would have spent over ZWL$600bn due to the costs of fuel, fertilisers and other key raw materials,” he said.

Mugano said if the government had allowed the market to fund agriculture and construction through long term bonds, ‘we would not be experiencing  such headwinds’.

He said: “Our challenge has been pumping money that is why the M3 has been running a marathon. Whatever is happening in the market is a response to the new developments in the market.

“All economic agents are rational and they just respond to market developments and its behavioural economics.

“It’s not like the economic agents are misbehaving but we  have to look closely who has pumped too much money into the economy  and contractors are buying forex to preserve value and the rate spikes but who has caused excess liquidity it’s the government.”

Economist with the University of Zimbabwe, Moses Chundu said it is government failure rather than market failure as its poor policy measures don’t address the current problems in the market.

“The insistence on an unworkable de-dollarisation roadmap when everything else in the market is pointing in the opposite direction is not helping with building of the much needed confidence to turnaround the fortunes of this economy. The burden of the futile journey to full de-dollarisation is being unfairly borne by the poor and wage earners including civil servants who have no means to hedge themselves against the side effects of the policy,” Chundu said.

“They’re being left alone to defend a local currency whose creators and sponsors don’t seem to believe in it.”

He added :“The businesses  are using the parallel market rate of around ZWL$450:US$1 in broad daylight daring the monetary authorities whose threats in trying to enforce the relevant instruments have proved futile.

The sooner the authorities accept this reality the better to save the poor and RTGS wage earners the burden and trauma of a failed policy.”

He said experiments on the currency and forex management system have caused enough pain to the citizenry and its time authorities reconsider.

“It has clearly not served the common citizen and we thought it is serving industry but with what we are hearing from industry representatives one wonders who it is serving.

“Whilst it is a good thing to have our own currency, clearly we missed a few points on the journey to de-dollarisation and from what is obtaining on the ground we clearly had a false start and may need to consider relaunching at an appropriate time in the future.

“Some of us warned right from the beginning that the issue was never about fundamentals and that advice was ignored,” he said.

The country’s largest business lobby group, Confederation of Zimbabwe Industries (CZI) recently  said:“CZI believes what we are witnessing on the Zimbabwe dollar is tantamount to a bank run on the Reserve Bank of Zimbabwe (RBZ). Mervyn King, Governor of the Bank of England famously said that it may not be rational to start a bank run, but it is rational to participate in one once it has started.

“The material and all the case studies on bank runs point to aggressive actions to restore trust in the institutions affected. Aggressive, transparent and visible actions are the only way to save the Zimbabwe dollar and stop the bank run. We are at a point where what to do is just as important as what should not be done,” CZI said.

Industry said the  Dutch auction was initially implemented according to the rules of the auction which were flouted and this is evidenced by the failure of the auction to settle bids and accumulating backlogs stretching over ten-week periods.

“This means the auction was auctioning money that was not there.

“We published and shared a paper highlighting potential pitfalls which was a comparative analysis of auctions that have succeeded or failed, and we have gone on to do what is in the auctions that have failed.

“The result of the above is that we lost the near convergence position that the auction had achieved in the beginning and trust was also lost especially after several promises of clearing the backlog and this is to companies that are still trying to find solutions to legacy debt of yesteryear,” CZI said. BusinessTimes