eBusiness Weekly
Taking Stock Kudzanai Sharara
Currency concerns, a growing budget deficit, a ballooning domestic debt, and a growing trade deficit, are some of the biggest challenges newly appointed Finance and Economic Development Minister Mthuli Ncube is expected to tackle.
All four and many others are critical, but Professor Ncube’s performance, like his predecessor Patrick Chinamasa will be judged on how he deals with monetary issues.
Zimbabweans simply want their cash in the pocket and be able to transact at their convenience locally or abroad. Anything short of that is not an option and will be viewed as a monumental failure.
While the Reserve Bank of Zimbabwe has the mandate to manage monetary issues, dealing with money supply, interest rates, inflation rate, among others, the country’s treasury is expected to make the final call on what currency is to be used.
The previous treasury head, Minister Chinamasa, and RBZ governor Dr John Mangudya introduced bond notes two years ago amid serious foreign currency and bank notes shortages.
The move was, however, rejected by some Zimbabweans who even demonstrated against the introduction of bond notes. Confidence was thus very low and the chorus was that the bond notes would chase away good money (foreign currency). As fate would have it, the availability of foreign currency became scarcer.
Suggestions were made for the country to abandon the bond notes and adopt the rand, or introduce a local currency, suggestions which were as we know rejected by Chinamasa and Dr Mangudya.
Minister Ncube, is, however, making the same suggestions.
According to The Sunday Mail of last week, Prof Ncube proffered three options, which included adopting the use of the US dollar only and remove bond notes. He also talked about negotiating to join the Rand Monetary Area as well as adopting a new Zimbabwe dollar.
Given the challenges that the country has faced using the current currency approach, there is a general agreement that currency reforms are needed.
But there are pitfalls. It’s not going to be easy and expectations have to be managed.
Prof Ncube’s first option of using the US dollar only, might find few takers, especially now when the US dollar is stronger against regional currencies, the rand in particular. This, experts say, will make local products less competitive at a time the country need to grow its export earnings.
Another challenge that Prof Ncube will have to deal with, if he is to scrap bond notes, analysts say, regards the issue of using bond notes as an export incentive.
“Whilst removing the bond note is the best way to eliminate the speculative currency trading arbitrage opportunities that are undesirable, it presents two new challenges for Prof Ncube,” said Walter Mandeya of Trigrams Investments.
Mandeya believes, removing bond notes immediately eliminates the export incentive, a tool which had proved to be useful in encouraging the growth of exports.
The removal of bond notes also brings us back to square one in terms of ease of transactions when it comes to availability of smaller denominations (change), unless bond coins are spared for this purpose.
While mobile money can bridge the transaction gap between the higher US dollar denominations and the need for small cash denominations, no investment has been made into the enabling infrastructure in terms of compatible point of sale gadgetry and countrywide connectivity.
There is thus need for more clarity around the transitional arrangements. The RBZ was clever to link the fortunes of their bond notes to exports. It ensured buy-in to their economic experiment by the business community.
Now the removal of the bond note linked incentives, which ranges from about 2 percent for inward remittances to about 15 percent for selected exporters will need to be carefully considered so as not to discourage these efforts by the private sector.
Mandeya suggested transferring the management of the incentive from the monetary system to the fiscal system as a way of addressing some of the inflationary issues around the incentive scheme.
“On the fiscal policy side, the incentive could be introduced as a reduction in the taxes, levies and duties associated with producing and managing the export of goods and services in a way that incentivises a much wider spectrum of economic players to become export oriented.”
Removing bond notes without addressing Treasury Bills and ballooning RTGS balances is, however, dangerous. The public must be informed at every step how nostro balances are going to be restored and how Government intend to plug the fiscal and trading gaps which are the root causes of the problem.
Bond notes are only less than 3 percent of the monetary system. TBs, however, are a bigger proportion of that system. They are the real problem, especially because they were being created without the corresponding inflows to keep the system in balance. This however brings other challenges to Prof Ncube, if he also deems TBs as a real problem, what instruments will he use to fund government projects. The farming season is upon us with command agriculture still party of the strategy. How will it be funded if TBs are to be ruled out?
Hopefully going forward Government will not over-rely on monetary policy “to a point where it attempts to become a substitute for fiscal policy.”
“Indeed, the central bank should not be involved in quasi-fiscal activities,” Prof Ncube said.
