Let market forces be the judge

Reserve Bank of Zimbabwe (RBZ) governor John Mangudya last week released his Monetary Policy Statement underpinned by the need for the economy to stay on course in fostering price and financial stability.

Mangudya said the Bank is pursuing a three-pronged strategy—fostering exchange rate stability, financial sector stability and management of money supply. 

The auction system will take care of exchange rate stability; the bank will continue monitoring the integrity of the financial sector and will pursue a hawkish monetary policy stance to kill speculative tendencies and tame inflation.

Such has been the thrust to weed out speculative tendencies that the central bank has escalated its open market operations (OMO) since October through the issuance of short term OMO savings bonds at 5% per annum interest.

As at December 31, 2020, the outstanding OMO savings bonds stood at ZW$14.1bn “representing significant amounts of sterilised excess liquidity”.

The Treasury says it has been posting surpluses and has a surplus at the central bank. In the past, the government’s overdraft at RBZ exceeded the stipulated 20% of the previous year’s revenue in line with Section 11 (1) of the Reserve Bank Act.

Treasury secretary George Guvamatanga said on Tuesday the government has cut its borrowing appetite.

The government borrows from the domestic market through the issuance of Treasury Bills that have become a de facto currency.

For any economy, the above scenarios could be a boon for its citizens.

Not for Zimbabwe.

Where RBZ talks of exchange rate stability, one expects prices to be stable in supermarkets and other retail operations.

This is not the case as prices of goods and services are heading north. Prices are going up by between 20 and 30% in US$ terms.

While the Treasury boasts of surpluses, the taxpayers are struggling to make ends meet as they take a battering from the effects of the Covid-19 pandemic.

It is during these trying times that the government should be rolling out its safety net programme to cushion citizens.

The government believes the rise in prices is a result of market indiscipline and has appealed for moral suasion.

If that fails, the government will be forced to intervene with Guvamatanga saying it was not the government’s intention to do so.

In economics, the government intervenes to correct market failures, achieve more equitable distribution of income and wealth and to improve the performance of the economy.

While the government scored a success in reining in mobile money operators, we caution against the haphazard intervention on prices.

History is replete with examples where a noble gesture to cut prices resulted in unintended consequences.

Over a decade ago, the nation woke to the Godwills Masimirembwa-led National Incomes and Pricing Commission that forced businesses to cut prices by half.

It did not take long to have empty shop shelves and a thriving parallel market for basic commodities.

It was at that moment that the traders “tasted” the greenback and that appetite has refused to go away.

The markets should be the final arbiter.

 On one hand, the government says market forces are working on the auction but on the other hand, they are failing on prices.

As the Russian nuclear physicists Andrei Sakharov once said, ‘you can’t sit on two chairs at once’.

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