16 February 2018

Zimbabwe: Unpacking the New Monetary Policy

The 2018 Monetary Policy Statement (MPS) was couched on the "open for business" narrative, which places the obligation on everyone to conduct business in a manner that promotes investment in the country. This narrative suggests that lack of investment, which is itself occasioned by capital constraints, is the major missing link in Zimbabwe's recovery efforts.

As already enunciated by the new President, Emmerson Mnangagwa, limited capital flows can be traced to a poor investment and business environment. It is therefore unsurprising that he has been globetrotting trying to spruce up the country's image as well as market its business and investment opportunities internationally.

Consistent with this new thrust, the Reserve Bank of Zimbabwe (RBZ) has declared its commitment to support the opening up of the economy for business through mainly monetary policy measures that ease the cash challenges. In making this declaration, the RBZ is fully aware that the cash challenges in Zimbabwe are inextricably linked to the performance of the broader economy. Therefore, no matter what currency you adopt, it will fail if the economy is not performing. As such, a sustainable currency solution should be based as well as supported by the economic rebalancing imperative -- increasing production and exports whilst simultaneously reducing consumption and imports.

Whilst concerted efforts are being made to improve Zimbabwe's investment environment, the truth is that it will take time for investors to warm up to Zimbabwe. They will always need assurances of protection of property rights and from other attendant risk factors that got us into our current situation. This is why RBZ has been negotiating for a facility of US$1,5 billion from Afeximbank since the beginning of the year, of which US$1 billion would be used for providing investment guarantees to potential investors.

The investment enquiries and approvals have always demonstrated the willingness of foreigners to invest in the country, but somewhere along the line these inquiries would not materialise into real deals due to the perceived and real country risk. Out of investment approvals of more than US$1,52 billion and US$2,3 billion in 2016 and 2017, only US$343 million and US$235,4 million were realised as net Foreign Direct Investment respectively. These statistics show that the country continues to perform poorly compared to its regional peers in Africa who attracted a total of US$59 billion in 2016.

Consistent with the "open for business narrative", the RBZ has made efforts to minimise the foreign currency remittance risk in Zimbabwe, which now seems to be a major deterrent to investment in the country. The bank announced that it is enhancing the nostro stabilisation facility by US$400 million to provide assurances that international remittances and individual foreign currency inflows received through the formal system will be available when required by owners, to meet foreign exchange requirements for importation of essential requirements as well as to provide assurance that investors will be able to access the proceeds from the capital in their preferred destination through the refinement and enhancement of the Portfolio Investment Fund, which is currently at US$5 million.

It is important that the RBZ always acknowledges the role being played by Afreximbank in sustaining the multiple currency regime, noting that dollarisation would be very difficult to sustain in the absence of access to the foreign currency capital markets, mainly the United States dollar. The apex bank revealed that as at December 31 2017, the country had accessed nostro facilities of US$1,1 billion from the Cairo-based bank. It had also drawn an additional US$290 million in bond notes provided under the Export Incentive Scheme of about US$500 million.

However, this notwithstanding, the inordinate exposure to Afreximbank, which is also working as a lender of last resort through its Afreximbank-backed Interbank Market Facility (Aftrads) for US$400 million is worrying. As such, the RBZ is advised to court more financial players to support the country with its nostro requirements. This seems a surmountable task for the central bank, considering that there are trillions of dollars to tap from developmental funds, sovereign wealth funds, fund managers, private equity firms and hedge funds that are seeking to diversify their investment portfolios to minimise the risk from the imminent demise of the oil industry, which most of them are heavily exposed to.

It is high time the RBZ starts engaging these non-traditional funders and also desist from continuing to pin all hopes on financial assistance from international financial institutions (IFIs) such as the World Bank and IMF, despite all evidence to the contrary. However, for good financial standing, it is commendable that Zimbabwe is progressing well in clearing arrears from IFIs, in line with the Lima Plan of 2015.

Zimbabwe would soon need to relinquish its obligation under the US$600 million Afreximbank facility that was provided to support it with its nostro requirements pending the start of the tobacco selling season at a time when the apex bank has already indicated that the facility would be replenished at a lower level of US$400 million. This may have negative ramifications on the cash situation, demonstrating why temporary solutions to the country's cash challenges are no longer viable.

There is need for a wholesome and sustainable solution to the country's cash crunch. That is why it is comforting that RBZ acknowledged that while dollarisation was useful to stabilise the economy from hyperinflation, it may not be the best to support the growth imperative of today in the face of limited access to foreign currency, mainly US dollar capital markets.

The central bank hinted that the country should start mapping its way towards de-dollarisation. However, as usual, the RBZ maintains that certain fundamentals should be in place before this economic imperative is implemented.

One of the apex bank's key fundamental requirements is the attainment of three months import cover, which is, of course, a downward revision from their previous cover of one year, ostensibly to reconcile with the Ministry of Finance's position. However, de-dollarisation is unraveling before our eyes. The mere existence of cash premiums on US dollar and bond note transactions, which are actually increasing every day, is a clear sign of de-dollarisation.

This is why the monetary authorities should be proactive enough and come up with a sustainable way to de-dollarise for the benefit of this imperative, which is mainly sustainable budget deficit financing of the productive sector enabled by monetisation of this deficit. The fundamentals prescribed by monetary authorities, mainly the three months import cover, are moving targets, which may be difficult to achieve in a short space of time, making de-dollarisation difficult to achieve in our lifetime.

The indication by the RBZ that the roadmap for currency reform in Zimbabwe will be predicated on a Currency Board (CB) and/or Gold Standard (GS) is quite sensible in view of the commodity-based nature of the Zimbabwe economy. It is quite easy to base the currency on a commodity or commodities such as gold or tobacco. This way, we can forward sell of these commodities and unlock significant billions of dollars to support the currency and rebuild the economy. That is why it is always important to have proper financing and marketing of our commodities mainly gold and tobacco.

The pace of getting Zimbabwe re-admitted into the London Bullion Market Association (LBMA) is discouraging, especially considering that the country has already met the requirement to produce at least 10 tonnes of bullion for three consecutive years. Last year alone gold production was at 24,8 tonnes following the production of 21,1 tonnes in 2016 but we are still selling our gold through Rand Refineries, which denies the country an opportunity to benefit from lucrative structures such as forwards and futures, which normally dominate the trade of the bullion in the international market.

Equally worrying is that the country is not tapping the full potential from its tobacco due to the suboptimal financing and marketing structures. Now that the Tobacco Industry Marketing Board (TIMB) has come on board as a tobacco merchant, it is important to explore direct marketing of our tobacco to China through the One Belt One Road Initiative and try to minimise the negative effects of cartel in tobacco.

However, it is quite comforting that the RBZ is trying hard to avail facilities to producers of exportables, mainly gold, tobacco and horticultural products.

The approach to utilise excess liquidity in the market to support business with potential to export is commendable. The increase in gold production is mainly attributed to the gold production facility of US$74 million which was mainly provided to artisanal gold miners, which contributed 53 percent of this production. Equally, tobacco production this 2017/18 season will be supported by the tobacco facility of US$28 million provided to TIMB to support more than 20 000 contracted farmers. RBZ indicated that it is increasing these facilities to US$150 million and US$70 million for gold and tobacco respectively so as to tap more value from these commodities.

Whist the support by the RBZ is commendable, it is discouraging that the banks are not being as supportive as we would want. Banks are de-risking and reducing their lending to the private sector they prefer to hold less risky Treasury Bills. This de-risking largely explains the increase in credit to government of 7045% to US$6,57 billion, which is significantly higher than the 6,97% increase in credit to the private sector to US$3,706 billion.

The continued decrease in the loan-to-deposit ratio to 44,81% by December 2017 from 56,64% the previous year is also revealing. This is why the RBZ should support the austerity measures by the Ministry of Finance by minimising deficit financing through Treasury Bills (TBs) and overdraft to the central bank. The increase in government debt is worrying and will make it very difficult to sustain the currency. TBs and bonds topped US$5,2 billion in 2017 from US$3,2 billion the previous year while overdraft on RBZ was in excess of US$600 million. Consequently, the country breached the statutory limit on government debt of 75% of GDP as well as the overdraft limit of 20% of the budget. Effective implementation of the austerity measures is expected to reduce the budget deficit to the targeted 4% of GDP in 2018.

For effective economic rebalancing, the RBZ recognises the need for the judicious usage of the scarce foreign currency, considering that the country's foreign currency generation is comparable to a number of African countries, but foreign currency shortages are worse in Zimbabwe.

Consistent with the need to effectively manage foreign currency resources through the foreign currency priority allocation system, foreign currency payments were reduced by 6% US$4,809 billion in 2017, which is commendable in view of a lower increase in foreign receipts of 1,4% to US$5,563 billion in 2017 from US$5,485 billion in 2016.

There is also recognition by the RBZ that the generators of foreign currency need to be incentivised to continue producing more. That is why the foreign currency retention schemes were revised favourably. Private exporters other than those of gold, diamonds, tobacco and chrome can retain all their foreign currency for use within 14 days. The encouragement is also to reduce overdependence on imports through promotion of local investment. That is why the efforts of the new authorities to increase investment plausible.

Gwanyanya is the founder and futurist of Percycon Global Fund Managers (SA). The company specialises in sovereign funding structures for central banks and governments. He is also the founder of Bullion Leaf Zimbabwe, which is a recently licenced Class "A" tobacco buyer. -- percygwa@gmail.com or +263 773 030 691. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society, email: kadenge.zes@gmail.com, cell +263 772 382 852.

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