Zimbabwe: Monetary Policy Fails to Address Crisis

The Monetary Policy Statement presented by Reserve Bank of Zimbabwe governor John Mangudya this week is a damp squib which fails to substantively address the prevailing crisis and is far removed from the reality on the ground.

The statement comes at a time the country is reeling from severe headwinds that include a debilitating liquidity crunch, acute foreign currency shortage, depressed production and runaway inflation of more than 500% which has decimated incomes and pensions.

The central bank chief left the lending rate unchanged at 35%, reiterated the expectation that year-on-year inflation will be 50% by December with month-on-month inflation being less than 5% during the same period.

He maintained the foreign currency thresholds for various sectors despite exporters and companies pointing out that the forex limit is woefully inadequate and hampering their ability to meet production targets. It has contributed to capacity utilisation tumbling to 36,4%.

Mangudya said the central bank will continue with the gradual introduction of bank notes and coins, with ZW$150 million disbursed in the last quarter of 2019 to bring the total amount in circulation to ZW$1,1 billion, which represents 3,2% of total bank deposits as at December 31 2019.

However, this is far from sufficient which means the long, winding queues for cash will remain, with the desperate cash-seeking public still having to buy money at punitive rates of up to 50%.

Mangudya's revelation that only 200 entities are in possession of half the country's total deposits paints a gloomy picture of the central bank's ability to control the circulation of money in the market.

Mangudya claimed that de-dollarisation is well on track at a time the local unit has lost massive value to other currencies and when most goods and services, including rentals, are being priced in United States dollars.

"The bank believes that the macro-economic signals that include fiscal and monetary discipline, prospects of positive economic growth and lower inflation are improving to support a gradual de-dollarisation process within a timeframe of 5 years. This is in line with other countries' experiences on de-dollarisation," Mangudya said in his Monetary Policy Statement.

He said the reduction of foreign currency deposits as a proportion of money supply went down to 37% by December 31 2019 with foreign currency-denominated loans in the banking sector standing at 22% of banks' total loans and advances by the same period.

The use of local currency, Mangudya said, continues to go, up reaching a total of ZW$459,6 billion from 189 million transactions in 2019.

"These measurements of the proportion of the use of local currency in the economy show that the country is on the right trajectory to de-dollarisation," Mangudya said.

Government banned the use of the multi-currency regime in June last year through Statutory Instrument 142, making the Zimbabwean dollar the sole legal tender.

However, economist and Zimbabwe National Chamber of Commerce chief executive Chris Mugaga does not subscribe to Mangudya's use of the country's deposit mix to measure the progress of de-dollarisation.

"The monetary policy is not a promising document. We need to step out of the comfort zone. You cannot use deposits as a proxy to measure de-dollarisation when half of the local deposits are with 200 entities," Mugaga said. "This was an open-ended monetary policy which needs to be closed at some point."

Mugaga added that Mangudya remains restricted by two pillars, namely the fiscal policy and the Monetary Policy Committee which has severely limited the latitude for him to adequately address the challenges facing the economy.

Economist Godfrey Kanyenze said claims by Mangudya that the de-dollarisation process is on track is far divorced from reality on the ground.

"It is so clear that the authorities have not been able to stabilise the Zimbabwe dollar," Kanyenze said. "The measures are cosmetic. The narrative is superficial as the reality on the ground suggests otherwise. If you look at the homes that are being sold , the rentals that are being charged, if you go to the doctor's or go to the informal sector, nobody wants to hold on to a currency that is losing value. It is only that they (central bank) have to talk up the economy. They are paid to do so. The economy is refusing, however, to be talked up. It needs more than them talking up the economy. They need to take decisive action."

Kanyenze said despite Mangudya's claims of being on track, the state of the country's economy is dire."What track are we talking about? We have been off-track for so long, we have forgotten what a track looks like. We are like a ship without a rudder on a night without a star. The track is with the cartels, not with the people," Kanyenze observed.

Mangudya spoke about enhancing the Reuters Forex Interbank Market Tracker System to improve the operation and efficiency of the foreign currency exchange market. However, he did not give the date by which it will be operational. The introduction of the interbank market in February last year has been an unmitigated disaster with 88% of more than 300 companies surveyed by the Confederation of Zimbabwe Industries getting only 10% of their requirements on the facility.

Economist John Robertson said the monetary policy failed to put in place measure to effectively stop the forex parallel market.

"The monetary policy could have been stronger if they had taken measures to do away with the black market," Robertson said. He said stabilising the exchange rate is the only way of ensuring the local currency retains value.

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