7 February 2014

Zimbabwe: Authorities Must Intensify Reforms

editorial

LAST week's maiden monetary policy statement by acting Reserve Bank governor Dr Charity Dhliwayo went to great lengths to point out causes of Zimbabwe's current economic malaise.

Some of the problems buffeting the economy include downside risks in agriculture; political uncertainty after elections and concomitant low business confidence; liquidity challenges and very high real interest rates on short-term credit; a ballooning wage bill in the public sector; collapsing infrastructure; possible compression of exports on the back of the fragile and slowdown of the global economy; potential destabilising effects of the indigenisation programme on the economy; and disorderly unwinding of vulnerabilities in the banking sector.

On Dhliwayo's list, liquidity, or rather the lack of it, was number one. This was naturally linked to problem number two on her list, an uncompetitive local production base. The economy is not only uncompetitive on the export market but also domestically where imports by far outpace exports. The result is the huge deficit on the current account.

With no balance-of-payments support to cover this gap, the nation ends up with a liquidity gap. Different schools of economic thought may differ on the relationship between liquidity and interest rates, but sticking to the old Keynesian theory, when liquidity is low interest rates are high and vice versa.

So the prevailing high interest rates charged by banks, which are inimical to the desired viability of firms and growth of the economy, are only but a natural economic consequence in that sense. This is a paradoxical conflict of interest.

More importantly there is no lender-of-last-resort so banks were assuming the entire risk themselves. That the central bank is reassuming this role beginning in March should be a relief to the financial sector because they can obtain funds to cover the short positions. And as Dhliwayo said, the overnight accommodation rate should give the country an idea as to where general interest rates should be going.

Down in South Africa, the Reserve Bank last week introduced a half a percentage cut in its base rate in a bid to rein in inflation as the rand has depreciated by almost 25% within a quarter year. The difference with Zimbabwe however is that South Africa still has much leverage in controlling interest rates.

The US$250 million pledged by Afreximbank to support the Reserve Bank of Zimbabwe's lender-of-last-resort is helpful but a drop in the ocean. That amount, for instance, is insufficient to cover the US$312 million deficit caused by the slow repatriation of export proceeds.

Nevertheless, the central bank hopes to inject liquidity into the market by introducing new innovations such as the long overdue secondary mortgage market. On their part, the private sector are being swayed to be more aggressive towards securing external lines of credit but the dilemma remains Zimbabwe's high country risk profile.

To complicate matters, investors want high returns in the form of high interest earnings. They are not in it for Charity. However,while authorities tackle piecemeal these issues they must always remember the path of holistic structural reform is way the forward.

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