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The Eric Bloch Column

The $21 trillion conundrum

By Eric Bloch

WHEN the news broke that the Reserve Bank of Zimbabwe (RBZ) had printed $21 trillion in order to purchase “free” foreign exchange, enabling Zimbabwe to settle some of its very considerable, and mu

ch overdue, indebtedness to the International Monetary Fund (IMF), wide-ranging outpourings of criticism were directed at the RBZ.

Although the IMF commended Zimbabwe for meeting commitments, albeit belatedly, it was nevertheless condemnatory of the action of printing money in order to finance the accessing of the critically needed foreign exchange.

In like manner, Zimbabwe’s economists (or, in any event, most of them), its captains of commerce and industry, much of the independent media, and very many others, have been vociferous in their disapproval of the RBZ actions. None disagree that Zimbabwe needs to honour its obligations, but most found it unacceptable that it should do so by resorting to the printing of money. Such a measure, all considered, was unacceptable in the extreme, although none suggested any other way that, at belatedly short notice, Zimbabwe could raise the foreign currency needed to meet overdue debt obligations.

Without exception, the foundation of the criticisms was that printing of money, unbacked by gold or other national assets, is a catalyst of hyperinflation. And, as a general rule, that is the case. However, for every rule there is an exception and, although many will disagree, the recent printing of $21 trillion to enable RBZ to buy foreign exchange can well be regarded as one of such exceptions.

Essentially, money printing fuels inflation in that, with greater volumes of money in circulation, consumer demands increase, widening the gap between supply and demand. As the extent of demands increases, whilst supply remains — at best — constant, prices rise. As a result, it is normally fully justifiable that the printing of money must be contained.

However, very little, if any, of the recent  $21 trillion printing will have filtered down to the consumer, and therefore the extent that any of those monies would be chasing after commodities in short supply was minimal. The recipients of the monies were businesses, NGOs, and like entities who were possessed of “free” foreign exchange, being foreign currency which is not subject to mandatory sale to RBZ, but can be held in foreign currency accounts (FCAs) for usage upon a widerange of approved purposes, in most instances, and virtually unrestricted usage in some cases.
Those who sold the funds to RBZ will, with very rare exception, have applied the sale proceeds to the reduction of borrowings, the purchase of capital goods such as plant, machinery and equipment, or to investment within the money and the equities markets. Very little, if any, will have been applied to the purchase of day-to-day consumables, compounding the scarcities of those consumables and, therefore, triggering yet further inflation.

In recent times the foremost components of inflation have included food, transport and communications, accommodation, education, and electricity. It is difficult to believe that any of these had their prices, in the last two months, driven by the fact that suddenly there was a greater amount of currency in circulation. The price of maize-meal skyrocketed because of extremely limited availability. That limited availability was not because consumers were buying greater quantities, but because Zimbabwe did not produce a sufficiency of the product (thanks to government’s near total destruction of agriculture), and due to mismanagement of imports.
A fortnight ago, a Bulawayo supermarket was selling imported, refined meal for  $975 000 per 10kg bag, as against a normal price of about $135 000 per 10kg! The printing of money did not drive that price up.

In January and February, transportation costs soared upwards, and especially so in the case of commuter omnibus fares. That was not due to any increased money supply in the hands of commuters, but mainly because petrol and diesel was only available from the black market, at a cost of about $200 000 per litre of petrol or diesel, being almost 10 times the official price.
In January TelOne, NetOne, Econet and Telecel all raised their charges, in many instances by as much as 200%. That was not because an excess of money supply increased demand for telecommunications, and therefore was not attributable to the printing of money. It was because of the exchange rate movements in December, and until January 20, and because of rising operational costs.

Accommodation charges surged upwards since the beginning of 2006. This was very considerably due to increases in local authority charges for rents, owners’ rates, sewerage and refuse removal, water supply, and the like, by up to 280%. The increased charges were not driven by the printing of money!
In like manner, government and independent schools alike increased school fees for tuition and for boarding very substantially at the start of the 2006 school year. Such increases were unavoidable, due to the overall impact of inflation during the third term of 2005 (which was before the RBZ printed the contentious $21 trillion, with especial reference to necessarily increased salaries, massive escalations in costs of imported textbooks and educational equipment, and immense rises in costs of providing board to scholars, over and above many other cost increases.

In January, 2006 Zesa announced tariff increases approximating 73%. That was not because consumers were using more electricity, enabled to do so by there being more money in circulation, due to RBZ’s allegedly irresponsible printing of $21 trillion. Unfortunately, so great is Zimbabwe’s hyperinflationary environment that inflation itself has become the biggest single trigger of inflation.
The burgeoning inflation drives up salaries and wages, as evidenced in collective bargaining negotiations, and the overall increases in operational costs force price increases. Those inflationary forces then cause yet further inflation, ad nauseum. So it is spurious, in this instance (and probably exceptionally) to ascribe present escalations in inflation to RBZ’s printing of $21 trillion.

Moreover, even if such money-printing had been inflationary (which it clearly wasn’t), there is justification in pondering whether “the end justified the means”.  If the Zimbabwean economy is to recover, an essential requirement is that it restores its international image of creditworthiness, of a safe and secure investment destination, of a reliable trading partner, and of a responsible   member of the international community, that can be trusted to honour its obligations — settling a significant portion of its arrear indebtedness to the IMF was a very major, most positive, action on the part of Zimbabwe, which must stand it in good stead in its embattled drive towards economic recovery.

Therefore, even if the printing of $21 trillion to purchase foreign currency did have negative repercussions (which is arguable, other than insofar as economic policy image is concerned) it could very well be contended that doing so was, as a rare and special exception, justified.
In that event, the wide-ranging criticisms of RBZ for undertaking printing of monies are unjustified. The answer to the conundrum as to whether or not the money should have been printed is, therefore, that it should, but that should not constitute a precedent for “willy-nilly” printing in the future.

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