The Mid-Term Monetary Policy Statement announced by Reserve Bank of Zimbabwe governor John Mangudya can be described as a well-intentioned "transition to normalcy" statement. It comes at a time Zimbabwe is grappling with an unstable macro-economic environment characterised by weak fundamentals including:
Run-away inflation reaching 175% in June 2019 up from 5% in September of 2018.Unstable exchange rate characterised by a depreciating local currency.
Negative real interest even with the bank rate at a high of 50%.
Low to negative GDP growth with the IMF projecting a 3,2% contraction in 2019.An extremely high unemployment rate estimated at over 90%.
Given the above challenges, the road is not yet clear on how the economy is transitioning back to normalcy. Many of the stated objectives in previous policy reform announcements are still far from being achieved. There are, however, positives including the following:
The apparent convergence of the parallel and interbank foreign exchange rates, albeit at a slower than desired speed but showing a narrowing of parallel exchange premium.
-- Some supportive policy tools being implemented such as:
-- Money Supply targeting.
-- Upward review of the bank rate to 70% (curtailing speculative borrowings and impacting positively on exchange rate).
-- The institution of a Monetary Policy Committee.
The introduction of measures supportive of a local currency system allowing the central bank to play its regulatory role and manage money supply. In particular, the governor acknowledged the shortage of cash as one symptom of the misalignment in the economy. This disequilibrium between supply and demand has led to arbitrage opportunities, creating distortions in the pricing mechanism. The governor acknowledged that the shortage of cash leads to the exclusion of the informal sector, rural populations and senior citizens.
(Currently notes and coins in circulation amount to ZW$600 million against a target of about ZW$1,5 billion. This has resulted in cash premiums as high as 50% by arbitrageurs exploiting this gap)
There still are significant grey areas though. These pose big risks on the direction in which the economy is transitioning.The statement betrays doubt in the authorities' scope of thinking and creates some uncertainty on whether the multi-currency system is effectively dropped.
The authorities still view the United States dollar as a currency of use internally.The following points are notable:
The statement itself is denominated in United States dollars and all data are reported in same currency. It is not clear whether this means the bank has converted figures from the Zimbabwe dollar into United States dollars for purposes of the statement and if so, the exchange rates used.
Of more concern if not alarming, is the proposed introduction of the United States dollar denominated savings bond at an interest rate of 7,5% per annum. Given the current US dollar interest rates levels, which are actually falling, the proposed interest can only be described as strange. Indeed, there are considerations such as country risk which make libor benchmarking inappropriate. The bond may likely be aimed at the diaspora cousins. However, that might open another arbitraging window (A topic for another discussion) It is not clear for which reasons the country is now being incentivised to make their savings in United States dollars. This proposal seems to signal a U-Turn on the de-dollarisation policy introduced in February 2019 for which one expects further supporting measures for local currency. This product even has a tax incentive and appears as if the authorities are in fact encouraging US denominated assets. Many questions arise including:
-- How will the local currency savings bond compete in an environment of mistrust that exists.
-- Given the experiences of our country regarding savings (including pensions and insurance policies) in local currency, how will the existence of a tax free United States dollar denominated product encourage preference to local currency. At the bottom of this paper, a proposition is made to adopt a twin currency strategy, albeit with the rand instead.
-- The hiking of the bank rate to 70% is rather a forced outcome given the inflation levels. This will further dampen an already weak lending, lower demand and production. The economy may get trapped in a tail-spin of GDP contraction.
While the statement has a positive and bullish outlook about taming inflation, it acknowledges that it may first peak at 200% before coming down as pressures still exists due to businesses indexing their pricing on the parallel exchange rate.
It also is bullish about the financial sector soundness with good liquidity ratios as well as increasing profits. Total assets are at ZW$23,5 billion as at June 2019 with loans and advances standing at ZW$6 billion.
Profits were at ZW$930 million. However, it should be a worrying note that the composition of the profits is heavily skewed towards non-interest income as opposed to the traditional business of banks i.e. interest income.
In this case interest income only contributes 15% while foreign exchange contributes 30%, fees and commissions at 21% is even higher than the core income of the banks and in total, 85% of the incomes comes from other lines. This is a depressing picture that should be a source of worry for the bank's supervisory role.
It is not a sustainable pattern. An economy transitioning to normalcy should have these figures in reverse to reflect the core business of intermediation by the banks, promoting lending to productive sectors and boosting GDP.
Finally, and in view of the signaled doubt on the removal of a multi-currency regime, since 46% of the country's exports are to South Africa and the same country accounts for 35% of imports, it is Zimbabwe's biggest trading partner and therefore it may be worthwhile to reconsider the issue of a sovereign currency in isolation.
Instead of a dramatic change, the adoption of a more gradual approach extending into the medium term (three to five years) may be preferable. It makes economic and trading sense to twin the local currency with the Rand during this transitioning period.
Examples abound in the Sadc region where dual currencies co-exist successfully, under varying degrees of exchange controls from completely free in Zambia to managed in Mozambique. The main difference however is that these countries twin theirs with the United States dollar which is where Zimbabwe is moving away from.
Tanzanian shilling co-exists with the United States dollar. The Mozambican metical co-exists with the United States dollar.The Zambian kwacha co-exists with the dollar.
In these countries their local currencies are stable and there is not a run on the United States dollar because there is enough confidence in the sovereign currencies. Zimbabwe, in transition, needs to enter a period of confidence building in a stepped manner. The removal of the United States dollar is acceptable as it has basically caused many of the distortions being experienced. While the Zimbabwe dollar (RTGS, bond notes) may be argued to be the strongest in the region, it is also correct to say it is probably the most useless simply because there is no market acceptance of it due to a dearth of confidence. The currency needs to be introduced with some level of support. A rand adoption, for the medium term, will gradually promote confidence and acceptance of the local unit.
Ugaro is a former expatriate banker and currently works as a Corporate Advisory Services Consultant. He is a member and past vice president of the Zimbabwe Economics Society.