The Sunday News
Dr Bongani Ngwenya
THE global economic systems long converged to free competitive market systems evidenced by the disintegration of the Union of Soviet Socialist Republics commonly known as the Soviet Union. The Soviet Union was a socialist federation in Eurasia that existed from 1922 to 1991.
It was a union of multiple national Soviet republics, its Government and economy were highly centralised. The country was a typical one-party state, governed by the Communist Party with Moscow as its capital in its largest republic, the Russian Soviet Federative Socialist Republic (Russian SFSR).
Wow, I have turned out to be a historian. Together with the People’s Republic of China (PRC), not the today China, the Soviet Union adopted a planned economy, whereby production and distribution of goods were centralised and directed by the Government. Notwithstanding the truth that there were other socialist federations as well, especially in Europe.
The first Soviet Union’s Bolshevik experience with a command economy was the policy of war communism, which involved the nationalisation of industry, centralised distribution of output, coercive requisition of agricultural production, and attempts to eliminate money circulation, private enterprises and free trade.
After the severe economic collapse, Lenin replaced war communism by the New Economic Policy (NEP) in 1921, legalising free trade and private ownership of small businesses. The economy quickly recovered. The fall of the Soviet Union, resulting in the disintegration of the member states so their economies growing even much faster as they embraced the free market systems.
China as we all know is today is the second largest economy in the world. My argument is that these nations resembled typical epitomes of socialism or command led economies. The nations as I have indicated in my opening remark above have converged onto free competitive market economic systems.
The fundamental characteristics of free competitive markets is the free play of the market forces of demand and supply to determine the only and only market prices for goods and services at equilibrium or balanced demanded and supply quantities.
Market forces operate at micro-levels that is within the individual economies and markets and at macro-levels that is within the greater global market, beginning with regional economic integrations such as the Sadc to the greater international or global economic community.
I want to believe that when we say Zimbabwe is open for business, we are saying it with full understanding that for that to happen Zimbabwe has to fully embrace free competitive market economic fundamentals. We need to appreciate that when Zimbabwe adopted Esap in 1991, it largely opened up its economic market and liberalised it to allow the free play of market forces largely.
There has been tinkering here and there in the past by the Government by adopting inward looking policies and imposing import restrictions, for example, against the spirit of free competitive market phenomenon.
The Minister of Finance and Economic Development, Professor Mthuli Ncube, alluded to the developments that are taking place in the currency market in Zimbabwe as largely an indicator that the economy is “self-dollarising” in response to prevailing market forces. It is not the first time that market forces have caused self-dollarisation in the economy.
They actually did the same leading to the abandonment of the Zimbabwe dollar and adoption of the multi-currency system in order to tame hyperinflation, reverse the economic melt down and stabilise the economy. Unfortunately, thereafter they were not supported to help facilitate quick economic recovery and subsequent growth.
The Minister said this when he was responding to questions on the developments in the currency market in the country during a dialogue at Chatham House in London last Monday where he outlined reforms to transform the economy. Prof Ncube said Government would not argue against market forces.
The net effect of the current situation is the culmination of how the RTGS balances were exposed right from the introduction of the bond note which suffered devaluation or discounting from the very time it was introduced in the country’s currency market.
By then the negative impact was hedged by the levels of the US dollar stock in the currency market. As the US dollar stock quickly diminished, its demand increased further causing the devaluation of the RTGS balances and bond note. Quoting the minister, he went on to say the following, “on the currency front, I think the market is doing all the work for me, I don’t have to announce…it’s very clear that the economy is in essence self-dollarising,” said Prof Ncube.
“If you look at the RTGS exchange rate and bond note exchange rate, the market has said these are not at par and I am not about to argue with the market. RTGS balances are sitting at about $6 billion, the value is going down. The market is doing all the valuations for us, and of course, at some point we will have to see how to handle that. Inflation is high now because foreign currency is available on the parallel market.” However, the Government has since secured funding to support the RTGS balances so that they remain at par with the US dollar.
But it’s clear that at some point bond notes will have to be demonetised. Zimbabwe has recently experienced a sharp increase in prices of consumer goods, and shortages of the basic commodities, which has spiked inflation once again, on the back of spiralling parallel market exchange rates between the US dollar and bond notes or electronic/mobile money.
We need to understand and appreciate that the so-called panic buying by consumers is a development in the market in response to market forces of demand and supply.
Any doubt of the operation of the fundamental economic principles can only do us a lot of harm. The basic economic principle is that primarily demand and supply of liquid money does not match, there is disequilibrium.
As a result, the little liquid money available in the market will certainly be expensive as the market forces want to balance each other.
In conclusion, the currency market requires a huge liquidity injection that in the immediate term can only come from external sources in the form of a bail out or foreign direct investment inflow.
– Dr Bongani Ngwenya is currently based at UKZN as a Postdoctoral Research Fellow and can be contacted at [email protected].
