eBusiness Weekly
Clive Mphambela
The Reserve Bank of Zimbabwe finally issued the much awaited 2018 Monetary Policy Statement on Wednesday under the theme “enhancing financial stability to promote business confidence”. The market was pregnant with expectations, and the question is: Did the good governor do justice to the pertinent issues?
Just so that we are on the same page, I am not a pessimist when I criticise certain elements of the policy. I am just being cautiously optimistic, as any economist should be.
Policy versus Strategy
The MPS does contain a good measure of positive and well meaning statements, most of which, however, do not really qualify as policy statements but are more of operational and tactical measures and responses to the current economic situation.
Some of the “policy measures” need to be infused into exchange control guidelines. A standard monetary policy statement should really speak to three or four critical areas of monetary management i.e. Interest Rates, Inflation, the Exchange Rate and Money Supply. Given our current circumstances, it was the duty and mandate of the central bank policy to speak directly and aggressively to these policy variables in the monetary policy statement.
To the RBZ governor’s credit, he outlines very clearly in his introduction, the issues that are at the core of the economic challenges that the country is facing. These are the cash and foreign currency shortages that have been “exacerbated by the transmission impact of the persistent fiscal deficit on the financial sector”, which many economists now also blame for the resurgence in inflation pressures in the economy.
The RBZ admits and observes that growing fiscal deficits are the major driver of increasing deposits and money supply in the banking sector. “Domestic monetary emission on the RTGS platform” is causing inflationary pressures.
In this vein, the intentions by the central bank to immunise excess liquidity in the economy via market driven Treasury Bill issues as well as the possible reintroduction of open market operations will be a very welcome development.
However, I contend that reintroducing these critical tools is fairly urgent and should have been given greater prominence and urgency.
The foreign currency and cash crisis still require solution.
The RBZ aptly notes that the long-term solutions lie in the building a sustainable growth in exports, and deliberate efforts to promote import substitution in the economy.
The RBZ notes that the recent narrowing of the current account deficits are due to growth in exports and stabilisation of imports.
This scenario is good in the short term. However, given that our exports currently have a huge import component estimated at between 45 percent and 49 percent, it follows that a sustained programme to curb imports may hurt exporters.
Already the debilitating foreign currency shortages work against exporters who are failing to access foreign currency timeously for raw materials and other intermediate goods that exporters use in their production processes. The MPS tries to ameliorate these issues.
However, the RBZ policy document does not propose alternatives to deficit financing of the government budget. This perhaps remains a fiscal policy issue, but, RBZ is the banker and advisor to the Government. One would have expected that an “Advisory Note” to the Government should have accompanied the Monetary Policy Statement, not only pointing out the ills of money creating deficit financing, but also proffering proposals for curbing the further creation or emission of hot money into the economy.
When one reads the MPS it only appears that the RBZ itself remains complicit in this affair, as its programmes will further inject new RTGS money.
The RBZ proposes several measures which, by my own calculations, will inject further RTGS money into the economy. In addition to sustaining the Government budget deficits, the RBZ itself will create at the very least a further estimated $500 million in new money via the export incentive scheme, which now stands at 12,5 percent for tobacco producers and while gold miners will earn an additional 10 percent.
In addition, special facilities for gold, tobacco, horticulture and macadamia are being increased and again, this will create new deposits in the economy.
What the RBZ should do is to motivate for an export incentive scheme that does not have the effect of creating new RTGS money (via Bond Notes).
A sustainable alternative would have been an export incentive that is funded directly from an equivalent import “disincentive” especially on non critical imports. The RBZ should explore other non monetary incentives that so that we slow down the pace of money supply growth.
Unfortunately the bank is instead, advocating for higher quasi-fiscal interventions in the economy that are likely to have negative monetary implications.
The bank’s intentions to disburse funds under various “productive sector” facilities equate directly to the strategies that led to developments that took place during the hyperinflationary era. While foreign currency generation is a key priority, due care should be exercised and efforts made to come up more refined mechanisms that can lend support to critical sectors that generate export receipts, without the expansionary impact.
The real costs of the Nostro stabilisation and other facilities are unclear.
Some of the questions that remain unanswered in one’s mind are: What are the exact costs and terms of the Nostro stabilisation facilities that are currently sustaining to the economy?
How are the facilities performing in terms of repayment? How and when are the facilities to repaid? Is financing current imports essentially from borrowings not an inherently dangerous strategy? These remain unanswered questions.
In the same vein, one is also forgiven to ask critical questions regarding the “ring-fencing of foreign investments”. How will the proposed guarantees work in practice? Will these guarantees on foreign investors’ investments not amount to penalising local exporters, who are subject to foreign currency shortages in order to give disproportionate comfort to foreign investors. How sustainable and fair is this strategy? Why would Government pursue a strategy that assumes foreign exchange risk on behalf of private capital. Is it not more optimal for the RBZ to create a proper free market for foreign exchange so that investors can carefully and transparently price their capital, rather than for us to tie a noose around the economy’s neck?
In his own words, the central bank chief says, the thrust of the 2018 Monetary Policy is to “liberalize the foreign exchange market”.
However, instead, one notes the obvious intentions of the RBZ to exert further controls on the market by perpetuating structure such as the export incentive scheme; surrender requirements on export proceeds; and other market distorting measures. This is hardly sustainable and flies in the face of market driven policies.
Inflation Risks are clearly set to remain high in 2018.
It is curious to note that from the inflation data presented by the governor, Zimbabwe remains the only country in the region which is experiencing rising inflation among its peers. Every other country is enforcing disinflation policies that are consistent with stable growth.
The MPS is silent on what the monetary authorities are going to do in order to tackle inflation in a more direct fashion. The risk is that developments in the informal markets will continue dictating pricing mechanisms in the economy; an unhealthy situation.
The inflation outlook statement from the MPS therefore does not inspire much confidence. Having clearly identified the causes of inflation as being excessive money creation activities, the central bank only says that it is essentially banking on “positive domestic and international goodwill” to mitigate inflation.
This hardly seems like an optimal strategy as it simply leaves too much to chance.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the writer is associated with.
