Dissecting the recent Monetary Policy Statement

Summary

•   The central bank policies on safeguarding financial stability through monitoring and increasing capital adequacy is commendable
•   The central bank is running out of foreign reserves and the introduction of two separate accounts (Nostro foreign accounts and local RTGS or Bond) is aimed at achieving two objectives:

i.                     Encourage the inflow of foreign currency into the country.

ii.                   Allow the printing of the local currency at a greater level

•     The recent increase in money supply will only translate into higher prices.
•     The current currency policy is not sustainable.

According to the Reserve Bank Act of 1964, the reserve bank of Zimbabwe has a mandate to regulate and or create monetary policies, protect the currency in the interest of balanced and sustainable economic growth as well as regulating the circulation of money. With the main goals of monetary policy being to achieve full employment in the labour force, ensure stability of the Zimbabwean currency and to achieve economic prosperity and welfare for the people of Zimbabwe.

Looking at the recent Monetary Policy Statement (MPS), RBZ should be applauded for pursuing the goal to maintain financial system and efficient payments system. Zimbabwe currently has a sound and well performing banking sector as measured by adequate capitalisation, earnings performance and asset quality. The recent MPS proposes to raise capital requirements of all financial institutions so as to cushion the financial sector from bank run and financial crisis. The policies and encouragement on the use of e-money are commendable from the economic perspective. This helps in reducing transaction costs and increase in efficiency.

However, apart from that, the main objectives that RBZ should meet are, so far, either absent from the monetary policy or are inadequately treated. An efficacious Central Bank needs to be:

a)      Independent from politics, policy makers and anything outside what is stated in Reserve Bank Act. Politicians are mainly concerned about short term gains in the economy to ensure re-election. Failure to make the central bank independent will lead to an excessive money creation which will always translate into high inflation. Reading through the governor’s executive summary or preface to the proposed MPS measures hints on the extent of the bank’s lack of independence from politics.  

b)      Transparent with its policies. The policies the central bank makes should be communicated to the public in a clear and truthful manner. Failure to craft the policies in a clear and easy to understand way will result in the unsuccessfulness of the central bank in achieving its core objectives.

c)       Accountable for its policies and decisions. The RBZ governor and his team should be responsible and answerable for any policy action they make. Without consequences to face after implementation of policies (good or bad) creates “moral hazard” which leads to the failure in delivering the objectives of the central bank as outlined in the Reserve Bank Act of 1964.

d)      The decision making process has to be made by a committee. The committee should be made up of people with the right qualifications and experience to hold such an office. This need no further clarification.

These four pillars help in building trust with the public. Failure to communicate with the public and instead surprise economic agents with abruptly crafted policies, only serve to cause panic and create a long-lasting uncertainty within the economy.

There has been an issue on the precedence of monetary policy and fiscal policy. These two policies are not substitutes per se, but instead should complement each other. Monetary and fiscal policies are relatively more efficient at dealing with different macro-economic objectives. So the assignment of these two policies should be based on efficiency. In that regard, there need to be coordination of fiscal and monetary policy.

There has been excessive credit creation in the economy ever since the reintroduction of local currency in the form of bond notes. Since 2013, the domestic money supply has increased by more than $5 billion from about $3.9 billion to $9.1 billion translating to about 135% increase in money supply. As of June 2018, annual growth rate of broad money stood at 40.8%. While the stock of bond notes and coins in circulation also increased by 14.2% from $331.94 million in December 2017 to US$379.20 million by June 2018. In comparison, GDP grew by 14% since 2013. It is a well-known axiom among macroeconomists that when growth in money supply out-pace GDP growth, the result is an accelerating inflation at a rate equivalent to the relative growth rates. With the rate at which the central bank is creating money we dispute RBZ’s inflation rate forecast of 7% and instead suggest that the inflation rate will move to double digit figures by the end of 2018.

Government has been out muscling the private sector out of the little loanable funds available in the market. Since 2013, government borrowing has increased by an estimated 67%. This has been crowding out private investment.

The MPS acknowledges the shortage of foreign exchange in the economy. The economy is too desperate for foreign currency and now the government is in a frantic effort to raise foreign currency, by any means possible. This is witnessed by even proposing to charge long distance trucks in foreign currency. The shortage of foreign currency is the driving force behind the splitting of the foreign currency and local currency accounts. Even though, this policy is aimed at raising foreign currency, conducted together with printing of money can only exacerbate the situation. As we have always argued, the introduction of the Zimbabwean currency is still pre-mature and yet the use of the US dollar is also undesirable. The US dollar has been appreciating against major currencies and has appreciated by about 32% against the Rand since 2014 and by 20% since the turn of this year. When the exchange rate appreciates, this makes imports cheaper and exports more expensive. Given that South Africa is Zimbabwe’s major trading partner, this explains why imports have increased so drastically while exports have not performed so well.

It is argued that adopting the Rand given the current uncertainty in South Africa (SA) and the cost associated with negotiating a deal to use the South African Rand is high. These are very valid points and should be really taken into consideration. However, let us weigh the options: return to local currency or using the US dollar have far more costs on the economy than the introduction of the Rand. The value of the South Africa rand has taken a downward trajectory and we forecast that it will continue to do so. Macroeconomic indicators in SA have all been on a downward spiral. We anticipate that in the short term, economic growth and employment levels in SA will continue to under-perform. We still contest for the use of the SA rand. In addition, to the points we raised in our previous publication, adopting a foreign currency (i.e. dollarization) should be construed as a short-term stabilization measure in the interim. Likewise, decision makers in Zimbabwe should prioritise crafting of appropriate and sustainable long-term measures on the monetary front that will reinstall confidence in the economy. It is against this background that we recommend complete abandonment of the bond notes and the US dollar in favour of the SA Rand.

The monetary policy dwelled significantly on the exports and imports aspect of the economy. Also the introduction of the Bond note was put forward as an export scheme. However, for anybody to sell anything, production should come first. Zimbabwe is significantly failing to produce enough output to sustain herself, let alone enough to export. We therefore, recommend that, instead of focusing on selling what we do not have, the policies should be directed at stimulating production in the primary, secondary and tertiary sectors.