Monetary policy in a shifting, unstable economic landscape

Dices cubes to trader. Cubes with the words SELL BUY. Selective focus

The economic honeymoon brought by the stabilisation of the economy after dollarisation in 2009 is over.

By Chris Mugaga

Mooted at the height of a landmark political settlement, the period from 2009 to 2013 saw the two major political parties in Zimbabwe, Morgan Tsvangirai’s MDC-T and President Robert Mugabe’s Zanu Pf, as well as the MDC formation led by Welshman Ncube, working together.

Two years into the coalition government, the economy had a promising start fuelled by a roaring rally in commodity prices, a decent agricultural season, as well as a unified voice in drafting economic policies, as the inclusive government appeared to be driving brand Zimbabwe ahead of any selfish interests.

Fast forward to now, all economic cylinders are stuttering with hardly any of them firing, a graduation from a deflationary state, a burgeoning import bill, unprecedented levels of smuggling, an el Niño phenomenon, which saw food security under threat as drought hit the greater part of sub-Saharan Africa, as well as a phenomenal rise in both domestic and external debt with the issuance of treasury bills (TBs) fuelling disequilibrium in the market.

The Reserve Bank of Zimbabwe (RBZ) governor John Mangudya introduced a raft of measures in an attempt to stem the rot. Traditionally the monetary policy had been an effective tool to deal with an overheating economy mainly through interest rate adjustment. With a depressed economy such as Zimbabwe’s, only a balanced fiscal policy can tweak the economy in a desired direction.

However, given the deep seated imbalances within the economy, an expansionary fiscal policy is not a feasible option given the limited fiscal space and a thin import cover which has left government more vulnerable than ever before.

These monetary policy interventions by the central bank include the establishment of a portfolio fund, an enhanced nostro stabilisation facility, limits on export of cash, diaspora remittances incentive, restructuring of the Infrastructure Development Bank of Zimbabwe, as well as the expansion of the bond notes facility.

I will attempt to interrogate the introduced policy interventions and predict their impact in trying to resolve the cash challenges bedevilling the economy.

The expansion of the bond note facility is coming against a background of complaints relating to illegal export of the notes to neighbouring countries.

In fact, reports suggest that between Mussina and Beitbridge, the bond notes are rampant, given their stable characteristics compared to the South African rand which had been under stress due to geo-political developments in Pretoria which continue to push the sitting president to the cliff edge amid allegations of corruption and succumbing to “state capture” phenomenon as reported in the former Public Protector’s damning dossier to the judiciary of that land.

The greatest concern is by bringing on board the bond notes expansion before exhausting the US$200 million facility by Afreximbank, the central bank is on a goalpost-shifting spree of now viewing the pseudo currency as a remedy to the cash crisis instead of taking it as an export incentive.

If the stance of viewing the bond notes facility as an export incentive was still holding, it is obvious we were to have an audit of how the facility has fared in increasing exports before even contemplating breaching the US$200 million mark.

Introducing more bond notes is a direct way of crowding out any remaining US dollars, which therefore means by year-end it will be almost impossible to get hold of a US$1 greenback note, at the same time, the bond note is expected to discover its true price, which means the parity to the US dollar might not hold even in retail shops where the bond was equivalent to the real note.

An enhanced nostro stabilisation facility is a noble initiative, but unfortunately it can only provide temporary relief, since the underlying pressure on the nostro account remains pronounced.

A pending plebiscite in 2018 will definitely pressure government to import other incidentals, meaning pressure on the nostro. The import compression measures which saw the trade size with South Africa dwindling by about 10% are not sustainable as they need a sunset clause, with a U-shaped recovery prospect of the economy, the threat of a re-emerging uptake in import bill remains high, thus further straining the nostro account.

The solution lies in expanding the major export receipt drivers from the five dominant products, namely tobacco, gold, platinum, chrome and diamonds. Notwithstanding its potential given the diversified structure of the Zimbabwean economy, the manufacturing sector contributes less than 3% to total export receipts while it is the most vocal in calling for the need to access forex.

The establishment of the Zimbabwe Portfolio Investment Fund is a realisation of how the priority list for the allocation of foreign exchange confirms not holding, a scenario where the priority list can only work efficiently in a scenario close to a command economy.

The market forces of demand and supply respect profitability and tradability. As much as we need forex for critical raw materials, the market might not follow suit, given the threats raw material importation faces from smugglers who know no forex application rules nor retooling, as their major pre-occupation is short-term profiteering and moonlighting.

In an uncertain economic environment as the one currently obtaining, it is certainly difficult to encounter a rational investor who puts more weight in raw material importation at the expense of other money laundering activities. The solution might lie in allowing market dynamics to define urgent market needs contrary to introducing a forex allocation mechanism.

The portfolio fund attempts to assist portfolio investors on our equity market. What drives the stock market trends is mainly perception, not government efforts to address the resident challenges. This, therefore, means there is need to revise some policy measures which scare away investors.

Given the long-term horizon associated with an equities market, repatriation of foreign exchange for securities-related transactions was not supposed to be apparently a major source of worry; what makes it ugly is the stampede to repatriate proceeds and if government is to set policies to facilitate repatriation of proceeds, this will not necessarily cool the nerves of such investors as they will definitely shun such an “investment trap” once they get hold of their funds.

One of the major hindrances to complete financial stability in the country is confidence. With a growing domestic debt, which has breached the US$4 billion mark and expected to spiral beyond US$5 billion by the announcement of the next mid-term monetary policy review, it is important for Treasury to “play the ball” and find channels to put a lid on the gargantuan appetite as evidenced recently.

To attract cheaper lines of credit offshore might remain elusive, which therefore means pressure on the already existing facility introduced by the central bank will remain high. The most reliable mechanism to support the real sector is the private players through advances from banking institutions, given the conservative approach by most banks when it comes to advancing credit to the industry, the reliable option becomes central bank interventions notwithstanding that it is not a reliable vehicle to grow the economy. A capitalised central bank should be able to supervise and bring sanity to the financial sector without resorting to being a player itself.

One of the traps we seem to have fallen into permanently is the belief that interventionist measures such as support schemes are the solution to market inefficiencies. The economy has resorted to a protectionist stance, where we think incubating our inefficiencies will wish away the resident challenges currently bedevilling us.

The deepening of parallel market trading is just but a reflection of market corrections, as much as it appears unpalatable that a three-tier pricing regime is in the offing, we can safely conclude to say it is a confidence argument at play.

If the greenback is slowly, but surely disappearing before us at a faster rate than the bond notes, it therefore holds that an exchange rate has to finally prevail to price the two different medium of exchange. If a fresh volley of US$300 million worth of bond notes is to be introduced, what is the tenure of the facility, what is to be solved by expansionary bond notes inducements which was not corrected with the US$200 million facility?

In the wake of news of a recruitment freeze, a trend analysis of state-owned enterprises has seen the headcount of employees going down by almost 20% since 2009, but this did not translate to a decreasing wage bill. This, therefore, implies a salary or recruitment freeze might be necessary, but far from sufficient to deal with stubborn recurrent expenditures. The introduction of new bodies, such as special economic zones and other noble initiatives such as the competitiveness commission, come with own costs.

This means that addressing recurrent expenditures requires a holistic approach, which also means interrogating the issuance of TBs. One might say a greater percentage of TBs were to solve legacy debt, but the unhealthy fiscal deficit trends might not make the legacy debt argument a reality.

Chris Mugaga is an economist and chief executive officer of the Zimbabwe National Chamber of Commerce. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com, cell +263 772 382 852.

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