eBusiness Weekly
The Zimbabwe Economic Society, a grouping of economists and people interested in contributing to economic development in the country, had a meeting with the Reserve Bank of Zimbabwe Governor Dr John Panonetsa Mangudya on Thursday last week in Harare.
The following are the excerpts of Dr Mangudya’s address to the society:
The currency reform journey started many years ago. In 2016, we introduced bond coins in this country at par with the US dollar.
The rationale for the introduction of bond coins was of course for the purpose of bringing change at par with the US dollar.
Many people made noise about that, as usual with Zimbabweans.
In 2016, we introduced bond notes, basically an export incentive scheme and I hope economists of your stature now understand why it was an export incentive scheme.
The purpose of the scheme was to ensure that this economy grows.
Indeed, we were quite happy that exports grew during the period the bond note was staged as an export incentive scheme. We saw companies like Delta, Varun Beverages, Lobels etcetera exporting and we are quite happy about that achievement.
It (bond note) was at par (with the US dollar) because what we had diagnosed in this country was confidence problem. When money was in the bank people didn’t rush to take it out so it was 1:1 in the bank. The parallel market rates were low from 1,2 to 1,5 whichever the time one could have looked at it.
So by the export incentive it means that we had shadow exchange rate because export incentive was basically a pre-counter being paid on the exports at 1,5 or 1,2 with the US dollar, which becomes a shadow exchange rate.
In October 2018, we then separated the RTGS dollar from the Notsro account or the US dollar account and the purpose was because we had noticed that the parallel exchange rate was moving very fast.
So after that, fast forward in February 2019, we then established the exchange rate between the US dollar and the RTGS dollar. The purpose was to ensure there was exchange-ability between the two; the US dollar and the RTGS dollar and the rest of other currencies and this was through the Statutory Instrument 33 of 2019 where the idea was to create an interbank foreign exchange market.
We did separation of accounts in October. There was state of panic in the economy and drove the exchange rate. And secondly, there was panic and people were trying to off-load as much local dollars as possible for goods and services since this was expected because people want to make sure there is store for value.
Other people were buying foreign currency and that’s why the demand for currency went up as people wanted to store value for money. When that happened that momentum carried so much anxiety in the economy to the extent that today the major challenge this economy is facing is that of confidence.
We have low levels of confidence in this economy, it is visible, it is seen, it is tangible.
And the second one is there are low production levels. Levels of production in this country are so low.
We import even basic commodities that we are able to produce ourselves in this country.
If I give you statistics of what we are importing as economists to drive my point home, you will be so surprised, I know you have heard me many times.
We do import wheat, which is a basic commodity in this country nine months in a year, we only produced last year wheat which saved the economy for three months only. The rest of other nine months we are consuming imports that is $12 million per month and we need 30 000 tonnes of wheat per month and 1 000 tonnes per day.
We import cooking oil (crude) in this country and we only produce soya bean which is good for only one month and for other 11 months, we are importing.
We import 45 percent of our milk from $7 million to $8 million a month and cooking oil we import about $12 million per month.
Then you ask yourself of course what God has done for Zimbabwe in terms of drought, we need to import almost 800 000 tonnes of maize.
I am talking about the demand side of foreign currency what would have happened if we were producing ourselves. So our second most critical challenge here is production, low production levels.
I have put confidence levels on top because I do believe in my heart that level of production is also influenced by the level of confidence. They do feed each other, they are self-feeding.
So these are our major challenges in this country. Fast track to June 24, we then introduced SI 142 2019 where we abolished the multi-currency system. What does it mean for layman point of view? We are not saying Zimbabwean economy will not use foreign currency no, but rather let’s start using the local dollar for the purposes of transacting in Zimbabwe.
Holding of foreign currency is permissible in this country either in your accounts or in your pockets and your home. We allow you to have your foreign currency, I know Zimbabweans love foreign currency. It is fact whether they export or they don’t export they just love it. But as we go to our shops, all we are saying is you just have to exchange your money in the bank or in the bureau de change and get your Zim dollars and go and purchase our water, our Mazoe.
So I want to make it clear that we are not saying don’t hold foreign currency, I gave some example many times. Ambassadors — they ask, are you banning the use of foreign currency? I said yes for the purpose of transacting in our shops, but for purposes of bringing money to Zimbabwe, these are free funds. There is money which is outside our exchange control system.
So there is an embassy from US,UK ,Canada wherever they will be coming from, they can pay their workers in foreign currency there is no problem. But if their workers want to use the money in our shops, they need to go to bureau de change or banks and purchase our currency.
So the coming out of SI 142 2019, many people ask — you seem to have done it in a rush, why were we not consulted?
There are two things on monetary policy issues you cannot go out and consult people whether to have our own currency or not to have it. There are other things we need not to consult.
Secondly, we saw that this economy was fast re-dollarising itself at a very fast pace. If we had not done what we did it was going to be a tragedy, it was going to be an accident so sometimes we need to respond accordingly.
Because of that speed of change, we needed to do it in a manner that we would address the fundamentals – this is where we are today.
So what is the benefit of local dollar? very simple, we want to ensure that the economy becomes competitive. There is no single country in the world that has ever become competitive by using a reserve currency. The USD is a reserve currency, it is a foreign currency. It should remain as it is as a reserve currency. America is the only country in the world that uses the USD as the reserve currency as well as for the purpose of transacting because they print it.
In our case, I know that it brought stability during the GNU during 2009 and 2013. Yes, it brought stability, but it did not bring growth, the growth that was seen in 2009 and 2013 was because the country was at a very low base after 10 years of not growing. But in terms of company growth in terms of firms coming to being operational, there was no progress.
So what was there was confidence not growth.
Having our own currency brings in competitiveness instead of now giving export incentives, we now use exchange rate as an incentive for doing business, for making sure people can export.
People will always ask me, will you not print more local dollars?
There are two things I always say — as RBZ — we have no appetite to print more money than what is available in the market. If we had that appetite, we would have done it many years ago, 2015 or 2016.
We are very strained when it comes to printing of money, secondly, we are no longer monetising the fiscal deficit therefore when central bank prints money, it is for a purpose.
For now there is no purpose and we have no appetite, because of that reason that is why in the economy right now there is shortage of two things — 1 RTGS dollar or local dollar, two there is no enough foreign currency. So you wonder therefore then why is this economy having an exchange rate of 10, 9 or 11 when there is no local dollars when foreign currency market is sufficient enough to have a lower exchange rate.
Let me give you numbers, our money supply stands at around $13 billion. That is when you multiply FCA’s with the prevailing exchange rate, but if you remove the FCA accounts our money supply is about $10 billion. Now you then ask yourself, in an economy which has $5-6 billion of exports per year how come the exchange rate is becoming between $8-11 when people have no money?
So to me when I look at this model, I say there are some variables that are not measuring up because inflation is caused by increased money supply.
To be continued next week.
