eBusiness Weekly
Business Weekly Last Word
The Monetary Policy Committee of the Reserve Bank of Zimbabwe is now becoming more authoritative and ensuring that greater weight is given both to analysis of monetary trends and in recommending the path that the Reserve Bank needs to take over the next few months and in providing it with sufficient protection to stop it from being abused by others running the economy.
While the committee obviously works with Governor Dr John Mangudya it is not made up by a bunch of yes men and nodders, but rather of competent people, some with very strong independent personalities, who can come to a consensus on the given information and data and the need, at the moment, to continue Zimbabwe’s economic reforms.
The committee last met on January 17. Some of its findings were not difficult and had already been noted by others. What was interesting is that the committee decided to discuss inflation trends before exchange rate trends, although the two are linked at the moment, but following the classical approach of looking at inflation first was a message that perhaps few realised. Yet this approach is one that everyone needs to adopt, rather than stand and worship the US dollar and pretend Zimbabwe has two functioning currencies.
Inflation is being tamed. Monthly inflation probably fell to around 15 percent by the end of 2019, which shows excellent progress although, by any normal standard, such a rate is appallingly high. Yet after what we lived through last year we did end on good news. As the committee noted, the deceleration should continue and monthly inflation reach single figures by the end of March and annual inflation, something kept out of the debate for a while, be down to 50 percent by the end of this year.
The committee was careful to qualify its predictions by noting that this was predicated on the continued emphasis of the Reserve Bank on price and exchange rate stability.
Which brought it to the second major area, that exchange rate. The high level of stability for four months since September last year was largely attributed to monetary targeting plus growing confidence in the local currency. This is a positive feedback; the more confidence in the Zimbabwe dollar makes monetary targeting easier, but strict targeting in turn encourages more confidence. We are getting it right but we cannot relax.
So the committee then moved forward, out of the realm of just the RBZ, into the larger economy and the full range of State activity.
Subsidies are in place or are being put in place. The committee was firm that these had to be funded from the budget, not from the Reserve Bank repeating the weird machinations that got us into this mess in the first place. Here the committee is, to an extent, pushing against an open door. Finance and Economic Development Minister Mthuli Ncube has been stressing that while he is prepared to pay subsidies he wants these targeted, paid from budget, and be paid in the particular step in the production and distribution process where cheating can be defeated and where the subsidy will not cause economic dislocation.
So far so good, but obviously both the Governor and the Minister need all the backing they can assemble to maintain such a joint policy, or rather such an identical policy arrived at independently. Here the growing weight of the MPC can be of help. But we do wonder how the Minister regards the second subsidy recommendation, that even the export incentive subsidies, must come out of budget funds, not RBZ funds. They are of course correct, but it might need a lot of push and shove to get that final point home.
The interbank market is gaining greater acceptance and greater use, but those who have to use it are quite often critical. The RBZ and its monetary policy committee are aware of the need for improvement and have now moved into testing of an electronic deal tracking system. This sort of real time information is necessary and desirable and as the committee noted will move us forward faster to the stage when all foreign currency transactions, including those for things like fuel, go through a single market. This is how a real country operates.
One problem is pushing ahead too fast is the lack of large foreign exchange reserves held by the RBZ. Normally, when a country in the sort of mess Zimbabwe was in takes life seriously and moves into real economic reform, it can gain help from the International Monetary Fund. At times this might bring in IMF real-time auditing and a degree of loss of total monetary independence. Usually this is not just acceptable but sometimes even welcome, giving more muscle to the real reformers when dealing with those too ready to back off and create the sort of mess that Zimbabwe did hit in the 1990s that then led to the world-record hyperinflation of the 2000s.
The committee recommended that as reforms continue to move the economy ahead that the RBZ starts to create its own gold and foreign currency reserves.
Yet Zimbabwe’s reserves are not that low. The problem is that they are held in nostro accounts by individual people and companies, not in a pool accessible to all and under the effective management of the RBZ. Added to that large pool are the known cash holdings of most banks, plus all those US banknotes under so many Zimbabwean mattresses.
Yet there is a near stable exchange rate. And it is easy to get at least 15 percent on short-term sovereign debt and better rates on private debt, and even being able to beat a falling but still very high inflation rate by stockpiling raw materials if you are a factory or groceries if you are a family. On those fundamentals it makes ever less sense to keep surplus cash in non-interest bank accounts or, even worse, under the mattress where rats and robbers can wipe it out.
This is where economic theory tends to part company with human fears and emotions. For many Zimbabweans, from CEOs of large companies down to domestic workers with US$5 under the mattress, the 21st century has been a very unpleasant roller coaster. The insurance policy, for that is what it amounts to, of maximising foreign currency holdings made sense at one stage, although growing exchange rate stability along with the gains of savings interest or cheating inflation is driving up the cost of that insurance. But people still say: “Keep your cash in US dollars!”
This will start changing if present trends, those the Monetary Policy Committee ably outlines, continue. Large companies are likely to be the first to liquidate at least a moderate proportion of their nostro holdings and gradually more; and gradually others lower down the scale will join them. But this is why it is so important to keep up the progress. Those fears are stickier than the sunny optimists at the top sometimes realise. They know they are making serious and significant progress. Others worry.
Zimbabwe is continuing to move into a new world, the normal economic world. But most in Zimbabwe were not born the last time we were on that planet, in the days before UDI in 1965. Even now few are totally confident that the Second Republic is going to move into that normal world. But as progress continues the degree of trust that we are moving forward to where everyone else lives will start overcoming fears. Meanwhile we need to keep up the pressure and keep recording progress and steering the ship in the right direction.
