‘Restructure, co-ordinate and produce’

04 Aug, 2017 - 11:08 0 Views
‘Restructure, co-ordinate and produce’ Dr Mangudya

eBusiness Weekly

Tinashe Nyamunda
Many reports on the Monetary Policy Statement (MPS) are largely focusing on monetary expansion through the printing of a further $300 million bond dollar (or bollars). This injection which will raise bond money in circulation to $500 million is backed by an African Export and Import Bank facility of the equivalent amount in US dollars, which are theoretically at par.

This has caused anxiety in some media quarters; with some anxious about the inflationary pressures this may yield. Given the parallel market exchange rates and the three tier pricing policy on hard currency, bollars and electronic transactions that has since been established in the market, these fears are not unwarranted.

But Reserve Bank of Zimbabwe (RBZ) governor John Mangudya tried to allay the public’s fears by reiterating that although the only option to ease the liquidity problem was increasing the bond cash stock by 150 percent; his administration would cautiously inject it through a sustained drip-feed strategy to mitigate against any inflationary pressures.

To this end, the RBZ is confined to the parameters set for it by the challenges obtaining on the money supply side of the economy and attempts to keep inflation within the SADC prescribed limits of between three and seven percent. But although the cash crisis is the most visible and direct challenge affecting people’s daily experiences in Zimbabwe, for me this is not the most fundamental aspect of the MPS.

I agree with Dr Mangudya that “reducing the challenges facing the economy to a symptom of shortages is negating the fundamental structural and indiscipline challenges facing the economy and gives a wrong impression that cash shortages are caused by banks and the Bank (read RBZ here)”.

In this case, Dr Mangudya correctly points to something that Minister of Finance and Economic Development Patrick Chinamasa’s Fiscal Review did little of — addressing the structural challenges that aggravate the economic, and indeed, monetary/cash challenges. There are debates on whether the RBZ should release more bond notes, given that there is very little foreign exchange left to go around, or should restrict money supply (M1).

As a strong sceptic of bond notes when they were first released, I must say that the RBZ has thus far managed to contain the inflationary pressures to only 0,65 percent using the drip-feed approach but this has no doubt come at a cost to the general public who have been deprived of cash.

So to this extent, we can only wait to see how the RBZ, working within a very circumscribed context, will sustain the stability of currency. But the elephant in the room is that there is very little cash in Zimbabwe’s formal banking channels apart from book entries held at banks.

In total, the country functions on $1 billion (bond coins consisting $25 million, bond notes of $175 million, and multi-currencies dominated by the US dollar amounting to $800 million) supposedly circulating or held as short term deposit or RTGS of $1,6 billion, which constitutes a fraction of over $6,2 billion worth of broad money supply held by Zimbabwean banks.

In the event of a sudden run on the banks, there would be chaos. Worse still, the $1 billion in circulation is either unevenly distributed;  with some having haemorrhaged out of the country and therefore it is likely that less than half of it is circulating within Zimbabwe.

Just like Chinamasa’s Mid-Term Budget Review and 2017 forecast, Dr Mangudya revealed that the country is operating through deficit financing with local and external debt at just over $11 billion dollars, almost three times the value of the National Budget.

For this reason, the Policy Statement largely targeted mechanisms that could correct this. In fact, the MPS was boldly titled “Produce and Create”.  Dr Mangudya lowered interest rates from 15,7 percent in 2016 to 11,94 percent in 2017 to stimulate productive sector financing.

Banks had reduced their levels of lending because of the high number of Non-Performing Loans (NPLs), raising their average liquid asset ratios to over 60 percent. But the Zimbabwe Asset Management Corporation (ZAMCO, which is also financed through Treasury Bill debt) acquired $898,57 million worth of these NPLs.

To bolster the financial sector,  Dr Mangudya also promised that the RBZ would enforce regulations that micro-finance institutions could not exceed interest rates of above 10 percent per month as a way of encouraging financial inclusion, especially of Small to Medium Scale Enterprises (SMEs).

To curb capital light which amounted to $30,51 million in the intervening policy review period, the governor established a portfolio fund with seed capital of $5 million.

The capital was availed to ensure that the Zimbabwe Stock Exchange, currently experiencing a positive run, begins to attract foreign investors and improve the ease of doing business.

Other mechanisms including regulating the circulation of money to mitigate against externalisation and instil discipline and efficiency, encourage savings through issuing a savings bond were also discussed.

Dr Mangudya encouraged women, horticulturists, cross border traders, youths, SMEs and people with disabilities, among other, to take advantage of their quota of the $ 190 million Export, Productive and Empowerment facility.

The governor also adopted an “Export, Subsidize or Die” strategy, suggesting that the range of export products must diversify beyond tobacco, cotton and minerals such as gold, chrome, diamonds and platinum.

To facilitate this, he pointed out the role of Agribank and the Infrastructure Development Bank of Zimbabwe (IBDZ) but especially reiterated the need to restructure the Industrial Development Corporation (IDC). The IDC, he suggested, should be restructured from being directly involved in industrial production as a player to a development finance institution responsible for stimulating industrial development more broadly, as provided for in its initial mandate when it started operations in 1964.

Governor Mangudya concluded by pointing out that in a multi-currency system, which the country could not afford to replace with a local currency until the economy had sustainably improved; the problem was not monetary policy but the need to restructure the economy to earn foreign exchange.

He also reiterated how recurrent dependency on Treasury Bills or debt to finance the state was unsustainable and economic recovery could never be achieved that way.

But what did all of this mean for Zimbabwe’s immediate future prospects?

For me, it seems that despite the slightly positive note of the MPS, it made it very clear on where the problem lies. Although expanding export incentive schemes, which is really increasing the stock of bollars in circulation by a further $300 million, this is meant to ease the liquidity problem on an inflation targeting basis of drip-feed but not resolve the economic crisis.

Even the Export, Productive and Empowerment facility provided by the RBZ is woefully insufficient to contribute towards sustainable economic recovery. At best, it only sustains individual livelihoods.

Governor Mangudya indirectly identified selected key fiscal aspects which the Minister Chinamasa’s Fiscal Review did not sufficiently address. For example, the question of the strategies that could be adopted in restructuring, at least key State Owned Enterprises (SOEs) as one way of addressing the economic crisis.

The RBZ Governor advised how the IDC could be restructured to stimulate the industrial sector through finance, including I suppose, extension support. In my view, the Ministry of Finance and Economic Development did not doing enough in terms of planning to grow the economy. This is why Mangudya reiterated the limits of monetary policy, choosing instead to suggest one or two ways in which Treasury could stimulate the production side of things.

In conclusion, the monetary policy can do very little beyond managing the country’s inflation targets, interest rates and monitoring banks and financial institutions.

The answers to the country’s economic problem lie within the purview of the Finance and Economic Development portfolio whose priority, I must agree with Dr Mangudya, is to restructure the economy, stimulate production in consultation and co-ordination of key line ministries and get the economy going. For me, although the theme for the MPS was “Produce and Create”, something which should be the responsibility of Minister Chinamasa’s portfolio; the more accurate theme from my perspective should be “restructure, coordinate and produce”.

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