The smooth functioning of any economy requires strict monitoring and adjustment of policies from time to time to address the behaviour of economic actors. It oes without saying that the behaviour of actors in an economy is fairly complex as they are not a homogenous group neither are the economic conditions of an economy.
World-wide governments consult experts from a cross section of industries to provide valuable input and insight into the workings of an economy. This panel of experts is often referred to as the Monetary Policy Committee and is constituted to advise monetary authorities on measures to take to address the functioning of markets in general.
The Minister of Finance and Economic Development (Prof Mthuli Ncube) set up such a committee in September 2019 to work with Reserve Bank of Zimbabwe governor to keep on the following key areas of the Zimbabwean economy. The MPC focuses on the following among other monetary policy specific variables:
- Exchange rate stability
- Price stability
- The functioning of the interbank market
- Trends in economic growth
Economic actors in any economy require consistent policies and predictable outcomes something that has not been regularly achieved in the Zimbabwean economy for the past decades. The MPC meetings are therefore critical in instilling discipline and their importance cannot be overstated. It is these statements that consistently shape economic behaviour and contribute to important investment and corporate board decisions. It is therefore important to analyse these statements and understand the implications of the statements made.
Faced with high inflation, the October month on month inflation rate soared to 38,95 percent, as a result of rising price levels in both food and non-food items particularly utilities and fuel. It is not hard to see why the MPC is keeping a close eye on the inflation data.
In its first MPC statement following their October 29 meeting the committee indicated that it expected month-on-month inflation to end the year at between 10 to 15 percent in December 2019. The jury is still out on whether this will be achieved or not, particularly given the source of inflation being both food and non-food item price increases.
From my analysis the second MPC statement was meant to align interest rates to the new focus on growth that was pronounced in the Budget statement presented last week. The statement indicated as much. However, it is very difficult to reconcile it to the first MPC statement which showed an impressive grasp of the work ahead for monetary authorities, which in my view revolves around containing inflation. The committee rightly observed that the high inflation is a result of expectations and a more than usual increase in reserve money. Viewed against this background, it is therefore quite surprising if not shocking that the MPC recommended a dramatic reduction in the Bank rate from 70 percent to 38 percent. When viewed against the soaring inflation rate is somewhat a misnomer. One of the strongest and often most effective tools monetary authorities use to signal to the markets a tightening of credit creation is high interest rates.
One could say the writing was on the wall on the level of interest rates when all tenders of Treasury Bills above 18 percent per annum were being rejected in the current open market operations being conducted regularly by the RBZ. Early last week the RBZ came onto the market looking to mop up $300 000 000 which again found few takers with subscription levels of less than 35 percent. The market is clearly sending a message that they expect higher returns from these instruments in light of high inflation. It is not that the liquidity to support government programmes is not there. Investors evidently prefer shorter tenors and want to see returns that are closer to inflation.
Viewed against projected Government expenditure, a budget deficit of $5 billion is expected, one quickly sees the hurdle facing Government in easing inflationary pressure through the tightening of interest rates. The interest rate variable needs to be watched closely by the MPC. There is a strong need to balance the two competing interests. The 2020 National Budget was largely an expansionary one as it is focussed on growth and job creation. This in itself is not the problem. The problem is whether enough attention has been paid to its financing and generally the fact that the economy is faced with many internal pressures. The government will do well to quickly conclude its privatisation programmes and avoid crowding out the private sector, which is in dire need of funding if the government is to attract investment and create jobs.
One comforting aspect of developments in the Zimbabwean economy in 2019 is the unmistakable return to market-driven economics which is being seen in the regular adjustment of utility costs across the board. While it is hard and expensive to adjust to, it needs to be done and will have the effect of eventually attracting investors in these key sectors of our economy. No country can develop without access to affordable energy. More importantly these adjustments are seen by the MPC as once-off adjustments, which is understandable. As such, the MPC is right in forecasting that inflation will stabilise without these shocks in the future. Barring a bad agricultural season in 2020, inflation should slow down in 2020.
Another important point highlighted in the second MPC statement is the observation that monetary authorities will need to help redirect resources to productive sectors of the economy through instruments at their disposal. One can see that the MPC was confronted with many mixed thoughts on how to align monetary policy to the revised fiscal policy. But the fact that the economy had to absorb once-off shocks in fuel and electricity tariffs was not lost to them. Therefore the trade-off between high inflation and high interest rates was easy for them to take.
Turning to other measures the MPC noted the importance of having a functioning interbank market and announced the formation of a working group comprising of Bank Treasurers and authorised dealer heads to review its operation and improve its functioning. Transparency is critical in the operation of any market and it is encouraging to note that by the end of the month the market will be able to track all foreign currency trades done by authorised dealers. The smooth flow of export proceeds also came under scrutiny and shows that the RBZ is becoming very much involved in the supervision and sound operation of financial markets.
On the whole while sending mixed signals on the issue of interest rates this interim MPC statement remained positive on the inflation outlook. Investors and economic players are watching closely the operation and sincerity of the MPC and it is therefore important for the committee to be thorough in their deliberations. Difficult choices have to be made and recommendations made were necessary to ensure that the country does not slide back on major policy thrusts. There is a risk of vacillation if competing interests go unchecked.
More importantly, the country must realise the need to attract external resources in whatever form, be it lines of credit, diaspora inflows, bilateral loans, foreign direct investment as a way of limiting mounting pressure on our meagre domestic resources.
A stable exchange rate remains important in the country’s medium to long term outlook, given the country’s reliance on the USD as a reference currency. The acceleration of privatisation of public enterprises remains a realistic source of resources in the short to medium term and could help shore up confidence in the economy in general while injecting much needed resources into the country.