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OPINION: Review of the Mid Term Monetary Policy Framework

The Zimbabwean government announced the much awaited Monetary Policy Committee (MPC) on the 10th of September 2019, a few days before the announcement of the mid-term monetary policy. The appointment of the MPC is provided for in the Reserve Bank of Zimbabwe (RBZ) Act of 2010 under section 29B. The Act requires that the committee operates as an independent body consisting of not less than 5 and not more than 7 other board members appointed by the president, in consultation with the minister. However the Act also states that the committee shall be chaired by the RBZ Governor as Chairperson (And comprise of the 2 deputy governors) and report to the RBZ Board of directors chaired by the same governor (Including the 2 deputy governors). The functions of the committee are to define the monetary policy framework in the economy through determining interest rates in line with the government’s economic policies and growth targets, and to ensure price stability to control inflation rate on the local market.

By Victor Bhoroma

It is fair to point that the announced committee meets the criteria required by the law in terms of financial knowledge, exposure and expertise in banking or monetary policy. The committee will be judged on the effective implementation of its recommendations by the central bank and the quality of the monitory reforms to be carried out by the bank. Key priorities will be controlling runaway inflation, restoration of market confidence in the central bank as a key institution in the economy and its impartiality on advising government on monetary policy.

The market is however skeptic considering the role played by the central bank in encouraging unsustainable government consumption through deficit financing and money printing in the past 5 years. Since 2015, gross money supply in the economy has been growing at a rate of more than 30% per annum whilst the economy only grew at an average of 2.3% per annum. The results are plain to see in the country with money stock of over Z$14.8 Billion and official inflation rate of more than 289% for August 2019. Managing the inflation rate will be a herculean task and one that needs absolute independence from the same central bank that created the monetary crisis in the first place. The market will hope that the committee is not a mere rubberstamping squad which simply nods to damaging government and central bank decisions especially on deficit financing through money printing and quasi-fiscal activities.

The mid-term monetary policy statement was announced on the 13th of September 2019 with a key focus on curtailing inflation. The following are the key policy highlights for various economic sectors:

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Cost of credit

The apex bank hiked the overnight bank accommodation rate (Interest rates) from 50% to 70% in order to control money creation in the economy and stabilize rates. This will slightly limit speculative borrowing as envisaged by the monetary authorities but it will also crowd out genuine borrowers in the market. Loan to deposit ratio has dropped from 41% (June 2018) to 36.5% meaning to say bank lending is significantly going down. Banks are de-risking and taking the cautionary route, probably through buying Foreign Currency or other securities because of high inflation levels and insatiable appetite for foreign currency in the market. This affects production capacity in the economy as funds available are not being used to grow the economy.

Managing inflation

With Year-On-Year inflation rate over 289% in August 2019, the central bank feels that the hike in interest rates and plans to limit reserve money growth to 10% this year will lead to a decline in inflation rate starting in October. If the target on limiting growth in reserve money is achieved and coincides with improvements in market confidence then inflation will decline. Interest rate hike may not achieve much in the local economy considering its peculiar dynamics. Unlike in other markets such as neighboring Botswana and South Africa where credit drives consumption of household goods such as vehicles, household appliances, mortgages and groceries. The Zimbabwean economy is cash driven and highly informal which means that it is less responsive to hikes in interest rates as a policy to control consumption. It’s also important to point out that inflation is being driven by exchange rates (particularly the parallel market) not interest rates so inflation is likely to continue spiraling in triple digit figures up to year end. Lack of confidence is affecting stability on the interbank market where only US$800 million has been traded so far since February 2019. The market has a lot of willing foreign currency buyers but very few willing sellers.

Foreign Currency Savings

In order to encourage US Dollar savings through Foreign Currency Accounts (FCAs) and USD cash deposits, the central bank is introducing a US Dollar denominated Savings Bond with liquid asset status at interest rates of 7.5% per annum. The bond has a minimum 1 year tenure and is tradeable on the local market while exempt from government taxes. The Bond will definitely encourage exporters, Non-Governmental Organizations (NGOs) and corporates to maintain their deposit levels or deposit more foreign currency in their bank accounts. The expectation is that the central bank will honor its obligations on the Bond and not introduce other statutory instruments that will dilute its secondary market or compromise future value for bond holders.

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 Update on Gold production

Gold deliveries to Fidelity Printers and Refiners (FPR) have fallen by from 17.3 tonnes achieved in June 2018 to 12.3 tonnes this year. The major causes for the sharp decline are miners’ resentment over the low retention threshold of 55%, payment delays by the central bank and the gap between parallel market rates and the interbank rates. Miners feel that they should retain more foreign currency considering the role played by Gold in the country’s export earnings and potential to realize more gains if they offload using parallel market rates. Side marketing of the precious metal has therefore increased significantly this year.

Deficit Financing and Money supply

As with other policy pronouncements, the announced mid-term monetary policy points to lack of policy coordination with the treasury too. Treasury is anticipating a budget deficit of Z$4.1 billion in H2/2019 (Since H1 had budget surplus of over Z$804 million) and it still remains to be seen how that deficit will be financed if the central bank has curtailed deficit financing. The central bank will also introduce new notes and coins gradually to equal 10 to 15% of the money stock in circulation.  This will go a long way in easing the persistent cash shortages in the market, even though the downside will be adding fuel to the inflation.

 Overall, 2019 is proving to be a trying year for the treasury and the central bank (in as much as it is to labour and industry) as managing inflation directly means activating an economic recession and increasing the unemployment rate in both the formal or informal sectors. This has resulted in a stagflation dilemma where inflation rate and unemployment continue to increase while GDP and corporate earnings are falling. There is however an urgent need to instill market confidence, control government spending on unproductive expenditure and incentivize long term lending to the productive sectors of the economy to boost economic growth.

Victor Bhoroma is economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.

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