RBZ focus on price stability welcome

22 Feb, 2019 - 00:02 0 Views
RBZ focus on price stability welcome

eBusiness Weekly

Taking Stock Kudzanai Sharara
Managing price stability more critical than quasi fiscal activities.

The long delayed 2019 Monetary Policy Statement (MPS) was finally presented on Wednesday, with Reserve Bank of Zimbabwe governor Dr John Mangudya presenting what most observers say was in line with expectations — the market wanted the exchange rate floated.

The liberalisation of foreign exchange market was thus the major highlight of the MPS. The central bank allowed banks and bureau de changes to participate in an inter-bank market that will then determine the going rate for foreign currency.

Said Dr Mangudya: “The bank is, with immediate effect, establishing an inter-bank foreign exchange market in Zimbabwe to formalise the trading of RTGS balances and bond notes with US dollar and other currencies on a willing-buyer willing-seller basis through banks and bureaus de change.”

From now on, the market will determine the going rate, a major shift from the long pegged exchange rate of 1:1.

However, also forming part of the new measures is the RBZ’s shift from quasi fiscal activities, to its traditional role of managing price and currency stability.

“We are saying that the central bank wants to move, to shift, to our key results areas of doing two things basically, price stability and exchange rate stability.

“By ensuring that there is a stable exchange rate in Zimbabwe, that inflation is low, it means we are basically preserving value for money and securing the purchasing power parity of money.

“We are taking the rightful role of ensuring that the value of money is restored and the best way of managing inflation is to make sure forex is available and stable,” said Dr Mangudy — and he is not far from the truth.

The purchasing power of money was being eroded by the parallel market exchange rate, which at most has been inflationary. The decision to let market forces determine the exchange rate will, hopefully, result in a lower and stable exchange rate.

It’s not an easy task, considering where the country is with regards inflation at 56,9 percent in January and exchange rates of between 3 and 4 times to the US dollar.

This, however, does not mean it cannot be done. All it will take is will power and discipline at fiscal level.

And Dr Mangudya thinks a plan is already in place. The best way of managing inflation is to make sure that there is enough foreign currency, that the rate is stable, that is the best way of preserving value for money, said Dr Mangudya.

He said the exchange rate will be stabilised by among other things putting in place lines of credit to stabilise the exchange rate. The inter-bank is also expected to provide foreign currency to bonafide transactions only.

Fiscal discipline is also key as an unrestricted appetite to spend will increase money supply and push both the exchange and the inflation rate.

Mangudya is, however, optimistic that the fiscal side is being taken care of.

“Right now we are so encouraged by the fact that the fiscal side of the equation is not producing RTGS balances as before and also the tax measures that have been put in place are moving money from consumers and reducing money supply.”

These measures are expected to help stabilise both inflation and the exchange rate. Working with demand and supply forces, banks are likely to reach acceptable exchange rates that will permit prices to gradually stabilise and allow businesses to start planning more effectively.

However, where this exchange rate settles in the next few weeks will have a major bearing on the inflation trends in the coming months. If price stability is achieved, it will then allow people to save and invest with confidence that the value of money will be stable over time. An unstable price level can lead to bad forecasts of real returns to investment projects and, hence, to unprofitable borrowing and lending decisions.

In a market economy, consumers and firms base their consumption and investment decisions on information derived from prices, including asset prices and returns. Uncertainty about the price level makes it difficult for firms and households to determine whether changes in individual prices reflect fundamental shifts in supply and demand or merely changes in the overall rate of inflation.

By eliminating this uncertainty, a monetary policy that maintains long — run price stability eliminates a potential drag on the efficient allocation of resources and, hence, on economic growth.

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