Zimbabwe: The Monetary Policy Statement: 'Transition to Normalcy'

18 September 2019
guest column

On the 13th of September the Reserve Bank of Zimbabwe Governor Dr J. P Mangudya presented the half year Monetary Policy Statement. A statement that was full of mixed figures and a few solutions presented in the statement. Inflation is rife and not surprisingly it was the first issue on the governor's note.

The removal of subsidies on some goods such as fuel and electricity are the reason why inflation is increasing as the commodities are trying to reverse the mispricing of the past. The governor also noted the risk of redollarizing of the economy , which means that we're still in a state of confusion since our last monetary policy statement. As it stands the goods such as fuel and electricity are not yet on their part price as they are still rediscovering themselves in a dedollarized economy, which in turn means that inflation is still going to be a problem at the end of the year 2019.

The Bank re-reviewed its Overnight Lending rate from 50% to 70% as a way to reduce speculative borrowing, where people borrow in order to participate in the parallel market. This has been seen as the source of some of our inflation. What this means to an ordinary citizen is that the lending rates of banks which are said to be between 35-40% are going to go up again. This will further discourage citizens and businesses to borrow money for consumption which is a plus, but also for production which is a worry for an undercapitalized country as ours. The Bank also established a Monetary Policy Committee compromised of men and women of high esteem from the different parts of the economy in order to help in policy formulation.

With such a high overnight rate, credit enhancing policies have been introduced in order to ease the burden of the cost of borrowing. They are advocating for banks to start long term lending in order for long term projects to be a reality. Any bank which has at least two year loan maturities on their books can now collaterize them at the RBZ in order to get more funds for lending from the central bank.

In order to have stable interest rates for productive sector financing, they will be linked to the 90 day Treasury Bill rate as determined by the market. It helps to stabilize the rates but the challenge is on how the market will react to more TBs and if they are willing to accept them.

In that MPS the Bank moved on to introduce new monetary policy measures in order to encourage savings. "USD-denominated Savings Bond" are the new kid on the block, they are there for individuals and businesses with extra forex to save their money and ease forex woes in the economy. These bonds are subject to a 7.5% per annum interest rate and a minimum one year maturity. The bonds are tax exempted in line with the government laws, there is going to be a bond market and they are going to be tradable. They are going to be classified as liquid assets. On top of that it is acceptable as collateral for overnight accommodation by the RBZ.

Citizen queues at banks and EcoCash to cash rate of 60% on the parallel market has prompted them to consider easing the cash shortages by injecting notes and coins regularly into the system. This process is not going to create money as banks will exchange RTGS balances for the notes. The Bank says that it want to match the Sub-Saharan 10-15% of broad money. So with a broad money supply of RTGS $15 billion we are looking at around 2.25 million bond notes and coins into the system.

On the broader economic outlook the country is in a dire state with a subdued growth rate of about - 3.2%. On that same note our Forex receipts have fallen by 24% to $2.58 billion from $3.4 billion from exports, international remittances, offshore loan proceeds, income receipts and foreign investment proceeds.

The fall was mainly due to a fall in receipts in the Mining (-19,6%), Tourism (-30.5%), Agriculture (-9.9%), and the Manufacturing (13.9%) sectors. Export shipments also fell by 7.5%, to $1.9 billion from $2.06billion. Gold deliveries are down by 40.6% to 12.3 tonnes from January to June from 17.3 tonnes in the same period last year. The fall was attributed to payment issues by the respective buyers as well as the exchange rate disparity and pricing issues. In the next half year we seem not to find solutions to these problems so the gold deliveries are most likely to decrease even more. The hope now rests on the ability of the large scale producers to increase production as the small scale producers cater for 60% of all gold production in the country.

On the Balance of Payments the deficit has narrowed from $1.265 million to $399 million, due to an increase in cumulative exports of $1.558 billion from nickel, tobacco, diamonds and jewelry. Our imports have fallen but they are comprised mainly of diesel 18,8%, petrol 9.3%, medicines 2%, and crude soya bean oil 1,4%. This improvement on the BOP figure, is because the imports have been subdued by lack of forex and rampant inflation which is depreciating salaries. On the other hand the exchange rate is also running away with an 81% depreciation of the RTGS dollar to the greenback.

In conclusion the outlook is not as bright as it sounds, we need to address some issues which are causing some productions to decrease. As for manufacturing and mining the depressed numbers are mainly due to electricity woes in the country, if we manage to halve them down our production will improve considerably. On the USD-denominated savings bond, much will depend on the transparency of the authorities on issues of change of currency and other disgruntlements that may arise. The return to normalcy is not going to be any easier and in all earnest we are a long way behind normalcy, but I wish the highly qualified men and women of the Monetary Policy Committee well in their quest to provide sanity.

Tapiwanashe Willoe Mangwiro is a researcher and an economist.

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