Take aways from the January monetary policy

Persistence Gwanyanya
IT is now beyond question, as the Reserve Bank of Zimbabwe (RBZ) conceded last week, that the country’s economic challenges can be traced to the unbalanced state of the economy. This imbalance is typically expressed in the high levels of consumption funded through imports and declining production.
Market indiscipline has also conspired with poor country risk perception to produce an undesirable economic state of a faltering economy since the last quarter of 2011.
Quite clearly, rebalancing the local economy requires supply side interventions, together with measures to gradually reduce consumption levels at both private and public sector level.
There is also need for indefatigable commitment from top authorities to tackle market indiscipline, which has reached discomforting levels.
This underscores the notion that monetary policy alone is not adequate to solve a country’s economic challenges.
Suffice to mention that under dollarisation, monetary policy would be impotent to solve a country’s economic challenges.
Regrettably, it seems RBZ is running the show as other stakolders charged with the responsibility of growing the economy are doing precious little to fulfil their roles.
In an effort to stimulate the production, RBZ has directed banks to reduce their lending rates to 12 percent from 15 percent per annum, whilst capping the associated costs of borrowing to three percent per annum.
However, the effectiveness of this interest rate policy will be weighed down by the absence of the lender of last resort function.
The lack of a base lending rate has therefore resulted in the different costs of funding for individual banks.
With heighted credit risk, banks are increasingly tightening their credit criterion as evidenced by continued reduction of the loan-to-deposit ratio to 57 percent from around 100 percent at dollarisation.
Whilst it is commendable that the central bank is alive to the need to resuscitate some of the distressed companies under Zimbabwe Asset Management Company (Zamco), there seems to be no shared vision from its peers.
Surely, a lot of value can be unlocked from the resuscitation of companies such as Ziscosteel.
And the potential in some state enterprises and parastatals can be realised through privatisation.
It’s a pity that whilst the Government has reiterated the need to privatise, precious little action has happened.
As such, companies such as Hwange, National Railways of Zimbabwe, Zesa and Zinwa continue to milk the fiscus.
Of note are the structural impediments that continue to weigh down efforts to rebuild the economy.
Difficulties in making foreign payments – as the Nostro accounts continue to dry up on account of externalisation and the economic imbalance highlighted earlier – seem to be a major drawback to doing business in Zimbabwe at the moment.
Whilst efforts by RBZ to come up with a Nostro Stabilisation facility of US$70 million is commendable, the market would have wanted more since some banks are facing foreign payment backlogs dating as far back as six months.
However, RBZ’s view is that this facility is expected to provide relief before inflows begin to be realised from tobacco and cotton sales which are expected from March.
This in itself also reveals an unhealthy concentration of revenue on limited commodities.
There is need to diversify the country’s revenue streams since 80 percent of earnings are currently generated by five commodities namely tobacco, platinum, gold, chrome and diamonds.
It makes the country vulnerable to the vagaries of volatile global commodity prices.
It’s quite comforting to note that the RBZ acknowledges that in light of the high level of informalisation in Zimbabwe, any measure that ignores this important constituency would be inadequate to provide a permanent solution to the country’s economic challenges.
What is heartening is that monetary authorities have prepared a package to enable informal traders to import.
It can also be interpreted as an effort towards financial inclusion.
Facilities ranging from US$20 million to US$40 million for the horticulture and mining sectors, respectively, is quite encouraging.
The horticulture sector used to be a major contributor to both GDP and foreign currency earnings in the country.
Similarly, the need to support small-scale artisanal miners is undoubted as they have become a significant contributor to gold revenues at 40 percent.
However, their operations need to be mechanised.
But there are fears the apex bank might be leaning heavily towards quasi-fiscal activities, which in some cases are toxic to the general well-being of the economy.
Equally, what is concerning is that RBZ’s activities are being funded from debt, which will increase the country’s indebtedness.
As at 30 October 2016, Zimbabwe’s public debt stood at US$11,2billion, which represents about 79 percent of gross domestic product (GDP).
Outstanding Treasury Bills amount to US$1,4 billion and there seems to be more appetite to borrow.
There is also an indication from RBZ that after the clearance of IMF arrears, similar payments to international financial institutions such as the World Bank, African Development Bank (AfDB) and European Investment Bank will be made.
This can only help unlock more financial resources for the country.
The continued scacity of FDI inflows must be considered as well.
The investment environment has to be made attractive enough for potential investors.
Ease of doing business reforms have to expedited in view of the sheer amount of capital required to reindustrialise the country and make it competitive.
About US$14 billion and $20 billion is required to close the country’s infrastructure gap, and an estimated amount of US$5 billion is required to reindustrialise the country.
The economic challenges highlighted so far have made it difficult for the country to sustain the currency regime.
Whilst the multiple currency system, together with the bond notes, have worked to the satisfaction of many so far, the sustenance of this currency regime is under threat from a number of factors.
As noted earlier, the country has remained a consumptive economy, largely depended on imports which are sucking out liquidity.
This is compounded by the high levels of externalisation.
Whilst the uptake of plastic money is encouraging, with 80 percent of transactions happening under this platform, it’s a pity that the rural folk are slowly adjusting to this new reality.
This has given rise to a US$35 million facility to support financial inclusion initiatives.
A review of fees relating to electronic money to US0,1c for small transactions will need to be supported by investment in efficient and faster gadgets that support electronic transactions.
This underscores the need for infrastructure sharing.
Quite clearly, there is a lot of effort needed to resuscitate the Zimbabwe economy.
Every economic player has to pitch and do what they are expected to do. Regrettably, there seem to be little traction from ministries charged with the responsibility of growing the real economy.
It’s important to highlight that the resuscitation of the Zimbabwe economy will depend on implementation of sound policies which will attract investment and reduce outflow of money from the economy.
Persistence Gwanyanya is an economist and banker. He heads the financial advisory portfolio of Zimbabwe Business and Arts Hub (ZBAH) and is a member of the Zimbabwe Economics Society. He writes in his personal. You can e-mail your feedback on percygwa@gmail.com, Whatsapp on +263 773 030 691 or bog on percyconadvisory.com.

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