Clive Mphambela Correspondent
RBZ Governor Dr John Mangudya delivered a most interesting 2019 Monetary Policy Statement (MPS) on Wednesday afternoon.
Eagerly awaited for weeks, the MPS presentation on Wednesday afternoon easily overshadowed the fact that one thousand miles down south, South African Minister of Finance Tito Mboweni was at the same time, presenting the 2019 Budget statement for the Republic of South Africa.
For Zimbabweans at large, this was clear testimony that for the first time in our history, the interest in our own economic affairs has reached dizzy proportions. An extremely good thing. What are some of the main positives from the MPS?
Refreshingly honest statement
The statement reflected an honesty and pragmatism about the macroeconomic situation and the fact that a number of variables, and previously held positions, can no longer hold. Whilst this is expected out of policymakers, there had come a growing view that the central bank’s hardline positions, particularly on the one to one peg, was unsound and almost intransigent. This price misalignment of a key resource in the economy had become the source of price distortions, arbitrage, rent seeking and fraud, inefficiency, and shortages in the formal market.
Exporters have become uncompetitive and the export incentive scheme introduced by the RBZ in 2016 has fallen out of relevance. Hats off for removing the peg !
Wide consultations were conducted during the conception and drafting of the MPS. That the Governor noted the numerous contributions made by the business community, banks, academics, media analysts and members of the general public which made an impact on the Monetary Policy and that he actually took on board market sentiment, to me is a recipe for success.
There is already wide spread buy in of the policy measures and all the governor now needs to do is to ride on the goodwill he has created and refine the policies as we go. There is no point in fighting the markets, rather the role of the central bank is to guide markets in the right direction and to extract the maximum economic benefits from policy for the economy at large. This can only happen if the public is supportive of the central bank’s policy.
What does formalisation of the inter-bank foreign exchange market mean?
The RBZ has in effect floated the exchange rate between RTGS and the USD by enabling the market-driven trading of US dollars through licensed banks and bureaux de change. This will bring order to the foreign currency market. Not only will there now be a reference rate for pricing of goods and services that have a relationship to foreign exchange i.e imports and imported components, but the public will no longer be subjected to arbitrary and invisible costing structures that have become pervasive in the economy
At the same time exporters and other generators of foreign currency can now legitimately derive value for their hard-earned foreign exchange in an orderly and regulated market in the context of the new framework for surrender and retention thresholds. The importance of this price discovery mechanism cannot be underestimated. Businesses and individuals can now make an informed view of the future movements of the exchange rate and this makes for better planning and risk management on the part of all market participants, including buyers, sellers and financial institutions.
Greater transparency in the foreign exchange market is essential and will promote efficiency in the allocation of foreign currency, at the same time promoting exports, Diaspora remittances and other inflows and investments which will benefit the economy.
Implications of the MPS on the broader economy
The RBZ Governor stated that the central bank considered the various accounting, financial, economic, legal and social implications embedded in the establishment of an inter-bank forex market within the context of the current national payment systems made up of multiple currencies, RTGS, mobile payment platforms, point of sale (POS), bond notes and coins. The re-denomination of existing RTGS balances, bond notes and coins currently in circulation as “RTGS dollars” is a technical move executed in order to “establish” an exchange rate between the current monetary balances and foreign currencies. The RTGS dollars thus become part of the multi-currency system in Zimbabwe. This requires a set of legal instruments and he advised that this has been put in motion. My view is that this legal framework should protect both holders of RTGS and financial institutions as well as agents in financial contracts. The unit of account function of money has also been adequately dealt with by designating to RTGS dollars be used by all business entities (including Government) and individuals in Zimbabwe for the purposes of pricing of goods and services, recording debts, accounting for and settling and clearing of all domestic transactions. This is a very useful strategy that minimises the costs of adjustment for all economic players. There will be very little cost on the economy for reconfiguring systems and rewriting or re-denomination of existing contracts. This is very significant and positive.
Is it all roses and chocolates?
The sudden dimunition of real value in USD terms of the current stock of monetary assets in the economy is, however, a cause for serious concern.
The anticipated open market rate for these assets (and liabilities) will be closer to current open market valuations of between 300 percent to 400 percent of the prior official value. This essentially means the whole economy has been recalibrated in one big bang. Whilst the market had largely adjusted, especially with respect to prices of most goods and services, there remains risk for unintended consequences. Incomes based on fixed contracts have been effectively devalued overnight, officially and this will potentially open up a few discussions.
Secondly, there are significant concerns about the efficacy of the lines of credit that the central bank says it has arranged in order to support not just essential foreign currency to underpin the exchange market, but to maintain stability.
Protecting the purchasing power of RTGS dollar and maintaining price stability will be a key test for the governor in the coming days.
The 30-day use it or lose it window for foreign currency earners to then sell their foreign currency into the market looks rather short. If the idea is to promote foreign currency generation in order to build foreign currency reserves.
Earners of foreign currency must be given greater leeway to decide when to sell as long as it is within a reasonable time. We may end up with exporters either offloading for the wrong reasons or using the forex for their own purposes in a suboptimal manner.
Key success factors
The Monetary policy is indeed complimentary to the Fiscal statement issued late last year by the Minister of finance. This policy congruence suggests that the policy will most likely succeed. The unbridled growth of monetary aggregates in the economy has already been repeatedly identified as a key source of macro instability. The Reserve Bank of Zimbabwe must, therefore, seize this opportunity to use all the monetary levers at its disposal to fine tune the economy and prepare it for sustained recovery.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of s organisations that the he is associated or connected with. This is adopted from our sister publication the Business Weekly.