Sundaymail Editor
Last week’s monetary policy statement (MPS) was a careful and conservative analysis of what the economy is doing at present and the kind of policies that are needed to cope with these circumstances.
The MPS also sought to lock in the gains made in the second half of last year to build low-inflation stability, but allowing for economic growth.
Many will have seen and welcomed the reduction in the policy interest rate, the absolute minimum that a bank is allowed to charge a borrower, although banks can charge more. This was cut from 200 percent to 150 percent, still a high figure.
The Reserve Bank of Zimbabwe has adopted the straightforward policy of ensuring that interest rates are high enough to make speculative borrowing a quick way to lose your money, in that the profit from any speculations using borrowed funds will be less than the interest you have to pay your bank.
Generally, this is done by ensuring that the interest rate is higher than the inflation rate, but in the curious Zimbabwean situation, the bank needs to look at the inflation rates that will affect the speculator.
Annual interest rates for most of the last three years have not been that useful, being a far too crude mode of measuring the rise in the cost of living over a year, despite a pair of dramatic spikes in the first half of 2020 and in the middle of last year.
The latest spike, from April to August last year, saw the sudden fast acceleration in prices from April to June, where the monthly inflation rate in local currency peaked, followed by another two months of monthly rates above 10 percent as the spike collapsed.
Those five months generated a very high annual inflation rate as the big monthly jumps replaced the far smaller monthly jumps of the year before.
The 200 percent rate was introduced as part of a range of market-related measures to block that inflation surge, collapse the pressure in the black market for foreign currency, largely driven by speculation, and put Zimbabwe on a general course of sustainable stability.
Within a few months of wiping out the spike, the measures had pushed monthly inflation below 4 percent, and the worst of those last four months of last year saw annualised inflation of just under 60 percent. But the Reserve Bank needed to retain the very high interest rates because a lot of people had borrowed money to speculate and an early cut would allow them to still benefit from speculation.
However, the monthly rate continued to fall, reaching an incredible 1,1 percent last month, which annualised just over 14 percent a year. So, with those five months of good low monthly rates, and these falling, the Reserve Bank felt it could start the careful, extremely careful by the look of it, process of reducing interest rates.
A great deal more action is possible within a few months when the annual rate, still just under 230 percent, suddenly starts falling very rapidly indeed as those dramatic monthly price rises between April and August are replaced by what should be very small monthly increases in the calculation.
But too many people come close to worshipping the annual inflation rate, even when it is the result of what is technically known as a discontinuous function, that is, with a peculiar spike in the middle of the sums, so the Reserve Bank has to keep the interest rate higher than pure classical economics might demand.
The most interesting point in the statement is that 1,1 percent monthly inflation for last month, the lowest monthly rate since we restored our local currency. That incredible progress in seven months since the peak of the spike last year needs to be preserved and maintained.
The other reason for maintaining a high borrowing rate is the degree of fragility in public perception, although not in economic fundamentals, of the exchange rate.
Zimbabwean inflation is almost all due to the black market exchange rate, regarded again by the economically less literate as something that reflects reality, when, in fact, it is a small component of our economy.
Only around 10 percent of foreign currency buying and selling goes through the black market, the other 90 percent through banks, and Zimbabwe has a net inflow of foreign currency, meaning more comes in than we can spend. Both those statistics should be seeing the Zimbabwe dollar strengthening, especially as exports keep rising faster than imports.
Already, the black market is more and more a convenience store, for people who want to trade at odd hours and places, rather than a source of currency. The 20 percent margin fits in with regional norms.
So, it is a perception, and that is driven by the speculators who like to buy foreign currency today and sell it for more next month or the month after. So, the RBZ needs to keep interest rates high and continue its two main measures of mopping up surplus local currency, with the gold coins having done the most work here recently, and drilling the speculators.
The other two main measures of the monetary policy were the rise in export retentions to 75 percent, with the retention for domestic sales at 85 percent. This, being coupled with a decision that the interbank market linking willing buyers with willing sellers is to be given greater importance. This was possible because of those fundamentals, of a positive inflow and exports rising faster than imports.
The percentages make it likely that many net exporters are now going to have to start pumping more money into the domestic economy, by buying stuff with their US dollars rather than just hoarding them in a bank account, or selling them on the interbank market when they want local currency. That requires a larger and more robust interbank market.
The two measures are, in fact, moving Zimbabwe faster towards being a normal economy, where market forces decide the exchange rates in total, with the Reserve Bank just using its own holdings to even out daily jumps and troughs but maintaining the trend line.
Few Zimbabweans are old enough to remember when this was the rule almost 60 years ago, so we are going to have to learn.
The Reserve Bank has done a careful job on its 2023 monetary policy statement, and it tells us that it will keep a big lid on speculation, but accelerate the movement towards that day when markets take the full burden.
Online Reporter