Lending ban to prick the market bubble — Mthuli




Prof Mthuli Ncube

The ban on bank lending announced by President Mnangagwa at the weekend to ward off attacks on the Zimbabwe dollar, stabilise the exchange rate and rein in on rising inflation, is only a temporary measure designed to “prick the bubble” of currency instability fuelled by market indiscipline, a Cabinet Minister said yesterday.

The Government is convinced the recent exchange rate movements were being driven by negative sentiments and indiscipline of economic agents as opposed to economic fundamentals.

In response, President Mnangagwa on Saturday announced a raft of policy measures to deal with the unwarranted and sustained depreciation of local currency to arrest an upward inflation spiral.

Among the interventions was the ban on bank lending and tightening of trading of shares on the Zimbabwe Stock Exchange (ZSE), which was being used for destabilising speculative trading in shares.

Zimbabwe, which enjoyed a largely stable exchange rate and exponential decline in inflation since August 2019, after inflation climbed to a post dollarisation high of 837,5 percent in July 2019, is facing renewed surges in inflation.

The depreciation has been blamed on rising global inflation due to the war in Ukraine and also domestic factors that include, chiefly, rapid depreciation of the Zimbabwe dollar on the parallel market.

The annual inflation rate, which had slumped to a two-year low of 50,1 percent in June last year, rose to 94,6 percent in April from 76,1 percent in March this year.

Floated at $2,5/US$1 in February 2019, the local unit now changes hands at $300-$430 against the greenback on the black market, $173/US$1 on the auction market and $275/US$1 on the interbank market.

In an interview with ZTN, the Mint Special programme yesterday, Finance and Economic Development Minister Mthuli Ncube said the Government had information on the widespread speculative activities driving exchange rate volatility driving resurgent inflationary pressures.

Government would, the minister said, take punitive action against perpetrators once full details on the extent of the misbehaviour have been fully investigated and reviewed.

Minister Ncube said rising domestic prices also had their roots in similarly rising prices across the globe, as commodity prices surge due to supply chain disruptions triggered by the war in Ukraine.

He said global oil prices had skyrocketed and coupled with price increases in other key commodities, global inflation was rising everywhere, including in the US, Europe and all emerging countries, while a strengthening US dollar has not helped matters.

“All that is putting pressure on all emerging markets and is transmitting global inflation into emerging markets, but we also have domestic issues which we grapple with here in Zimbabwe,” the Minister said.

The Treasury chief said Zimbabwe’s international trade situation was steady, with export inflows strong after hitting record high of nearly US$10 billion in 2021, which has persisted in the first quarter of this year.

Further, he said the country’s current account position was in surplus while the fiscus was performing satisfactorily, stressing that the fiscus position had in fact seen a balanced budget over the last couple of years or so.

Authorities have also further tightened monetary controls, whittling down quarterly growth in liquidity from a high of about 22 percent at the beginning of last year to zero percent now.

“So, our fundamentals are strong, yet we see the parallel market rate raging the way it has been doing. Partly, it has to do with the global situation. . . because we are using a hard currency, the US dollar, as a domestic currency.

“So, agents also react to global uncertainty very quickly, in fact much quicker than agents in other countries because of this issue of a dual currency.

“Also, there is speculative behaviour, which is inherent in our market and also there is the histories having come out of a hyperinflation environment prior to 2009.

“All of that history and overhang is still sitting on (economic) agents, so they tend to overreact, but there is a lot of rent seeking as well or indiscipline in the market,” Minister Ncube said.

Minister Ncube said Zimbabwe’s economy was not in crisis given growth projections remained strong, maintained at around 5 percent as initially projected late last year.

The economy is projected to have expanded by 7,8 percent in 2021 driven by strong agricultural performance, following the goods rains received, and massive public infrastructure programmes.

Indiscipline in the market, Minister Ncube, entailed economic agents not adhering to the law and regulations relating to treatment of currencies, trading in the parallel market and investments in equities and forex as well as price setting in the retail sector.

“Indiscipline is something that we need to deal with and we will make sure that we enforce the measures that we have put in place to deal with this indiscipline,” he said.

Minister Ncube said the suspension on bank lending was only temporary and meant to prick the bubble driving speculative activities on the stock exchange and parallel market, resultantly stoking inflation.

“These are temporary measures, what we are trying to do is to prick the speculative bubble, which has emerged in the forex market as well as in the equities market.

“We have information and we know some of perpetrators that were using banks to borrow cheap liquidity; cheap in the sense of negative real interest rates, to the speculate and take positions on the parallel market, but also root some of the proceeds on to the equities market and then just keep playing around the equities and parallel markets,” he said.

“So, we had to prick that bubble and this is how we decided to do it,” he said. 

Minister Ncube said while the Government could have dealt with the speculative borrowing by raising interest rates, it did not want to punish honest economic players, which would also increase the level of non-performing loans.

“As I said, it (ban on bank lending) is temporary and we will get to a point where we can loosen up and open up.”

Minister Ncube reiterated that the fundamentals that determine currency movement were strong, including reserves of US$1 billion, “that has not happened in years.”

He also mentioned a strong current account, fiscal position, tight and strong monetary policy stance and growing xports.

“The fundamentals for a strong currency are in place and yet we see this situation, which has to do, as I said, histories, indiscipline (and) rent seeking behaviour, which is inherent in any situation where a population has come out of hyperinflation.”

The parallel market, Minister Ncube said, was exhibiting an asset price bubble through the price of foreign currency (exchange rate) and sustained bullish trends on the stock market.

“The idea really, was to prick the bubble and begin to constrain certain behavioural practices that were just pushing on this speculation and causing havoc in the market,” he said.

He said among the measures announced by President Mnangagwa was the 4 percent transaction tax on forex transfers, which he said would tilt currency preference towards use of the Zimbabwe dollar.

To improve price discovery and deal with disparities in the market, Minister Ncube said the Government had introduced the willing buyer willing seller system through banks, which will be used in the setting of prices.

The auction system would remain in place, but as President Mnangagwa directed, would only see the central bank selling on the stock of foreign currency that is available.

To discourage speculative buying and selling of shares on the stock exchange, transactions executed within 270 days would attract a weighty 40 percent tax.

Minister Ncube said he was confident the measures announced by President Mnangagwa at the weekend would correct all anomalies in the market and boost warped confidence, if not, he said the Government had enough additional “arsenal in the back pocket”. – Herald