More active policy needed to change perceptions

21 Feb, 2020 - 00:02 0 Views

eBusiness Weekly

BusinessWeekly  Last Word

Monetary Policy Statements have now returned to the levels of conservative ideals not seen for a quarter century as Reserve Bank of Zimbabwe Governor Dr John Mangudya stresses stability, prudence and good governance.

The RBZ, as he noted, has its work cut out. Money supply reached $34,5 billion at the end of last year, not a dramatically high figure and very little higher than six months previously and when you divide by the population is comes to just $2250 for every woman, man and child in the country.

What is dangerous is the huge inequality in the way this money supply is distributed. It is not distributed evenly. About half the money supply is concentrated in the hands of 200 entities, and with the average in this group being $86,25 million there must be several dozen holding more than $100 million in liquid cash deposits.

That sort of liquidity can be used for good or ill, and without the RBZ keeping a very close watch some will, no doubt, use it in ways that damage the economy. Slopping $100 million around can create large waves. For example, we have twice seen single entities causing a lot of consternation and confusion in the fairly small black market for foreign currency.

The first time the RBZ took time to react. The second time it moved far faster, identified where the money slopping around the market was coming from and turned off the taps by freezing the account.

The waves that could be created by a multiple rush into some avenue does not bear thinking about. Hence, no doubt, the stress Dr Mangudya placed on liquidity management and his determination to effectively manage liquidity through a wide range of instruments.

In fact, this high level of liquidity in very few hands, coupled with exceptionally low liquidity in the hands of the other 15 million entities or citizens, is exceptionally dangerous when we consider the lemming-like behaviour exhibited by Zimbabweans whenever fake social media messages circulate, or even when rumours bounce around the bar at the golf club.

Dr Mangudya, his bank and his Monetary Policy Committee have their work cut out to change perceptions as well as manage those things based on facts. And perceptions are the largest problem since the facts are becoming less threatening and more hopeful all the time as prudent management moves the economy forward.

There are more radical ways of managing perceptions, up to and including negative interest rates on large cash holdings or on foreign currency holdings, at least when those nostro accounts are based on export earnings not on the free funds that Dr Mangudya rightly wants to protect.

Negative interest is not something new and is not something that is done by wild bankers. Switzerland has used this tool and no one can really call the Swiss banking regulators and guardians of Swiss monetary policy irresponsible or even excitable.

Money sloshing around in demand deposits really needs to be put to work, productively, and the RBZ could easily build up a policy environment that encourages moving cash into productive uses and discourages keeping piles of it in bank accounts, especially in nostro accounts.

The other area of pressure that Dr Mangudya is looking at is changing the way banks think when they start lending money. It has been obvious for a long time that banks have become enamoured with consumer loans based on the security of a salary. Such loans are rarely productive and have simply been a source of liquidity to boost consumer spending and to boost imports of foreign-made consumer goods. Neither is a particularly useful way of spending Zimbabwean resources and both put pressure on the inflation and the exchange rates.

Dr Mangudya is now increasing the funds available to banks for onward lending for productive purposes, but he has put in a catch. A bank gets more or less depending on how its loan book splits. Banks with the bulk of their lending for productive purposes will get more to on-lend. Those who insist on filling their loan book with consumer loans will get less.

That is a start.

But Dr Mangudya could go further, using the power to set statutory reserves. Banks with high levels of consumer loans might well have to maintain a larger statutory reserve than a bank that lends primarily to farmers, miners and manufacturers.

There is no need to over-manage markets by setting percentages that must be followed. But using market forces to encourage virtue and punish vice does not seem unreasonable.

The prudence thread running through the statement is seen in the resetting of minimum capital requirements for banks, with the rest of this year for banks to meet these although new entrants have to start with the new levels. This helps enforce stability and prudent thinking in the banking world, and helps build confidence in the general population.

The final area where more action is probably required is in what Dr Mangudya rather inelegantly calls dedollarisation, the switch from using the US dollar to using Zimbabwe dollars. A large part of the switch, so far as use goes, has already been done. Where the largest problem now lies is in the thinking. Too many think in US dollars, do their sums in US dollars and then convert at the last minute. It would be infinitely more helpful if everyone was thinking in Zimbabwe dollars throughout.

Unfortunately both the RBZ and the Government sometimes act differently from what they say. It can send the wrong signals to allow licensing of service stations that can sell fuel legally in foreign currency; it can even send the wrong signals when Dr Mangudya sets capital requirements for banks in US dollar terms.

There are some good reasons for such thinking, especially in the turbulence we have seen in the past 18 months. But as stability continues to grow we need to start taking special measures to change perceptions and thinking, as well as managing actions. Admittedly it is easy to manage actions; regulation and legal requirements can do that rather well.

Changing perceptions is probably that long process that Dr Mangudya talks about. But he and Minister of Finance and Economic Development Mthuli Ncube need to think about ways that accelerate that process, and at the very least not fuel it.

 

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