Policy consistency critical to currency confidence

03 Jul, 2020 - 00:07 0 Views
Policy consistency critical to currency confidence

eBusiness Weekly

Elias Pacheso
If you follow this series you will know that I am a strong opponent of inconsistency, as it discourages investment and proper planning. Zimbabwe has become synonymous with unpredictability as last week saw the dramatic closure of mobile money platforms and suspension of trade on the Zimbabwe stock exchange, in an effort to curb what was clearly becoming a currency crisis.

The country is no stranger to policy shocks but this one was unexpected and rather drastic as over 85 percent of transactions are now electronically relying on one major player.

It was the Government’s intention to send the message home that it will stop at nothing to protect the Zimbabwe dollar’s value by any and every means necessary.

Over the last 20 years many economists including myself have been baffled at how the economy seems to repeat its currency cycles as I highlighted last week. What is clear in all this is that the pensioner or an ordinary man on the street with no social protection tends to suffer.

What can be done to stop these wild cyclical swings of the currency, which we have now begun to accept as part of our daily lives in Zimbabwe? The currency swings remain linked to the financing of the budget deficit through the increase in money supply. When I read that the Monetary Policy committee had resolved that the Reserve Bank of Zimbabwe introduce Open Market Operations (“OMO”) I was quite pleased because money supply has always been the elephant in the room and will remain so if the country does not address the issue of recurrent government expenditure.

When all is said and done increasing confidence in the Zimbabwe dollar is tied to cutting Government expenditure and as long as there is no attempt to do so, it is clear that the Zimbabwe dollar will remain a one way bet.

I am quite pleased that over the last two years, there has been an attempt to use interest rates to manage the cost of money. This week the RBZ raised the base rate from 15 percent to 35 percent in an attempt to raise the cost of money. This at a time year-on-year inflation is 785 percent.

As things stand inflation is the main reason why our currency is weak and its management should be the focus of Government policy.

Without belabouring the point, if we fail to contain inflation, trying to shore up the value of the Zimbabwe dollar in the hope that it will stop prices from rising will not work. The Government must focus on reducing the level of money supply in the economy. This reduction is tied to dramatic reduction in Government expenditure.

External shocks remain the major problems to any attempt by the government to cut down on expenditure at this time. Covid-19 and drought induced food shortages remain major threats that are unavoidable and require significant funding. This is why the RBZ this week invited banks to participate in the $500 000 000 treasury bills issue, to mop up excess liquidity in the market and provide critical resources to government departments to deal with pandemic and hunger. It will be interesting to see what the yield on the 270 and 365 day issue will be, considering that the minimum lending rate has been increased from 15 percent to 35 percent.

One thing is clear, this is not the time to be borrowing as the cost of money is about to go up sharply. If you have the means to cut your borrowing do so. If everything goes according to plan this could be exactly what the doctor ordered. Flush with liquidity and high inflation the only safe haven investment instruments for investors have been the stock market, hard currencies and property. Fixed income instruments have not been getting any attention from investors. When the stock market is reopened expect prices to come off sharply as investors try and lock their profits.

On the other hand companies that are heavily borrowed will be forced to pass the costs to consumers to meet their higher interest payments. This complicates the situation but does indicate that there is a signal by the Government to the markets that the long forgotten inverse relationship between the stock market prices and interest rates should be restored.

The unique position that the Zimbabwean investor finds themselves in is an unenviable one. Market volatility and abrupt policy adjustments make it very risky to invest, and this unfortunately often means the most stable investment remains hard currency cash.

Giving advice to the ordinary man on the street at this time is very difficult because there is so much uncertainty in the economy. Better days are coming of course but it won’t be without serious pain. Dismantling old structures of subsidies is almost complete as we have seen fuel prices being adjusted in line with the exchange rate. This unfortunately means consumers should expect further price increases until the ZWL finds its correct level. There after consumers should expect price stability.

Whether it is intended or not these policy adjustments will help in stabilising the currency eventually. The key question is will the government stick to its guns as the economies squeals under the pressure of high interest rates and tight liquidity on the money markets. The key lesson in all this is we should never let things deteriorate to a level where they are difficult to contain.

It’s always important for the left hand to know what the right hand is doing to avoid dropping the ball.  In the long term we will benefit but in the short term we will have to take in the pain of policy realignment. As they say “no pain no gain”.

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