Unpacking RBZ’s monetary policy

It would have been proper if the Reserve Bank of Zimbabwe highlighted a summary of last year’s Monetary Policy Statement and what measures it took and whether the measures were successful in meeting the objective. Then it would have been prudent to tell us where we intend to go vis-à-vis current efforts and finally how this monetary policy will drive the economy towards the objective.

Generally, a monetary policy should be more of a central bank’s reaction to economic fundamentals aimed at maintaining a stable rate of inflation, promoting sustainable economic growth and low unemployment. Of these, which more is important is subject to debate and depends on which branch of economics one subscribes to.

The RBZ issued its monetary policy statement last week Wednesday and we have mixed views about the course of action prescribed in the text. There are a few positives, some flaws while one or two points do not make a dent on any economic fundamental; they just do not fit.

On the whole, the policy lacks in key instruments that may hasten the pace of engineering some form of turnaround in the ailing economy. In other instances it looks more like an offshoot of Government’s fiscal policy littered with suggestions to both Government and the private sector. Besides the further liberalisation of the cross border movement of money and capital, of which we applaud the RBZ, what else is there?

In contrast to our politics which champions pro-people policies, this monetary policy seems more like an ad hoc attempt to implement supply side economics. This type of economics tends to emphasise the benefits of making markets, such as labour more flexible with the aim of increasing productivity, eventually shifting Aggregate Supply.

This is why possibly there seems to be a lot of emphasis on competitiveness and some suggestion of tweaking labour laws. However, supply side economics requires privatisation, deregulation, reducing income taxes, removing trade barriers, reducing the power of employment councils, and deregulation of financial markets.

So is our Government geared to implement these changes? We doubt that as they have failed to do so in the past. The RBZ and perhaps Government have to fully understand and appreciate that half-hearted attempts do not yield the desired result.

For instance, trying to redefine economic theory for the purposes of giving a certain impression of positivity is not ideal given the circumstance we are in. We thus beg to differ with the RBZ on inflation and their definition and for that very same reason; their assumption on inflation is ill- advised.

Unless of course they are coming up with their own definition of what is classified as disinflation versus deflation. Let us debate and come to a common understanding; we might have to revisit economics 101. It is then appropriate that we define the two for the purposes of this argument and for the sake of positive criticism that enhances our chances of turning around the economy. Otherwise we risk prescribing the wrong solutions altogether.

Disinflation is when there is a marked slowdown in the rate of inflation and Deflation is when inflation is below zero. And the last time we checked the inflation data, Zimbabwe’s inflation rate was southward of zero. So the RBZ is wrongly informed and thus risks coming up with the wrong antidote. Deflation is characterised by low levels of liquidity, high levels of bad debts, and slow down in credit.

It would have been advisable to come up with some inflation targeting measures possibly looking at the options of improving money supply cognisance of the fact that we cannot print money. The options are there but the critical component always comes down to political will. This means that the continuous TB issuance by the RBZ has to be revisited as potentially this could be one of the root causes. Price correction will only occur once our industries are producing goods and services efficiently and not as a result of liquidity pressure as is the situation in the country.

Generally, there is low aggregate demand in the economy and this is why most companies are reporting major declines in volume sales. The decline is across all the sectors of the economy. A simple trip to a kombi rank and a quick snap survey will tell you that kombi operators have been witnessing a major decline in the number of trips they make on a daily basis in comparison to other periods. The waiting times for kombis to fully load are now longer. Even vendors will tell you that they are seeing a drastic reduction in sales. Or being much more orthodox your local supermarket will tell you that sales volumes are down.

The idea that bond coins enhance competitiveness is in essence trying to sell a dummy. The reasoning behind that assumption is not correct. Imports have been cheaper not because of availability or lack of change thereof. It all comes down to operational efficiencies within our industries. Yes, Government and its agencies are overcharging fees relative to the size of the economy when it comes to service provision (cost of doing business), but only to a certain extent.

The real issue is that we cannot compete because firstly the exchange rate works against us; secondly our industry is dead and most importantly the companies that are still in existence do not have the capital to invest in newer advanced efficient machinery that lowers production costs.

The old antiquated machinery consumes a lot of energy resources and in most case are labour intensive. Sable Chemicals is your typical example of a company that is utilising technology from the 1950s to produce ammonia. How can that compete with Chinese fertiliser producers that are taking advantage of latest energy efficient technology?

The capitalisation of the RBZ puts into question the way the Government is handling its affairs. We now have a lot of structures with third parties unnecessarily. There is one for bond coins, interbank, gold; including the RBZ arranging a facility for financially troubled Hwange. We are now slowly drifting back to where we were in the 1990s; ballooning Government debt.

We are now seeing Government implementing by default some form of quantitative tightening. A situation where Government is now dependent on issuing more debt instruments to finance itself and in the process squeezing out the private sector from accessing capital, worsening the liquidity situation in the process. With limited access to international capital, local businesses are now competing with Government for the scarce capital that is available locally, constraining businesses at the same time.

The risk of a Government default is made worse by the fact that the Government itself is still failing to pay its wages and not to mention the outstanding government debt. We are brewing a future bubble if we are not careful. Since our Government is financially stressed, this is why previously we have argued for a similar Fed-like structure or a more radical Swiss model where the central bank has publicly listed shares. The result will be a capitalised central bank with real assets that can be utilised to prop up the financial markets.

Generally, central banks can operate profitably with zero capital with only a few exceptions in the world, but in our case there is some huge negative net worth and constraints hindering the RBZ from discharging its duties.

The Government in its desperate gasps did not think through the complications that will arise from how they capitalised the RBZ with a classical complicated structure which offers no solution but puts into question the quality of assets held by the RBZ.

This basically means the RBZ is still hindered useless as before and will not have capabilities to be a lender of last resort. We now see the reason why we have to depend on the AfriExim Bank for an interbank facility. The $200 million interbank facility while being appreciated fails in addressing the real needs of the financial markets. The Zimbabwean economy really needs a local wholesale market for money, which is missing at present and this facility falls far short of what is needed.

The nature and structure of the facility is detrimental to the whole purpose of having an interbank facility. For instance, the only collateral that will qualify for banks to access the facility is any form of trade related instrument which meets a certain criteria which was not highlight in the text. Basically, how many banks in Zimbabwe are underwriting international trade transactions? Which means few banks will qualify and obviously the ones that need to utilise this facility the most will not qualify, and we should therefore not expect much changes in that regard.

In addition, we would have preferred a quick solution in resolving the concerns surrounding the distressed banks among other issues. Case in point, some of these institutions have been fund raising for the last three years if not more. There should have been a solution that would have seen these banks not eventually going into judicial management or liquidation as was the case with Allied, Trust, Tetrad and Interfin.

As we said in the past when we advocated for a ZAMCO like structure, splitting the good assets from the bad assets with ZAMCO taking over the bad assets and the good assets being sold to more stable banks. This would have seen the RBZ saving at least some of the depositors’ funds unlike what we are witnessing at Royal Bank. The continued delay in resolving the issue of distressed banks could potentially exacerbate the risk.

Rather than dismissing the issue on the back of the market size of the banks concerned the RBZ should have taken a bold stance, and enough is enough.

The foray by the RBZ into gold mining is ill-timed and not to mention that it is an unnecessary distraction. The central bank should not involve itself with running businesses. – Wires.