Monetary Policy must offer concrete solutions

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The governor of the Reserve Bank of Zimbabwe (RBZ), John Mangudya, is expected to present his Monetary Policy Statement (MPS) soon amid high expectations that his pronouncements will address a plethora of challenges that have caused the economy to implode. Chief among them are the liquidity crisis, rising inflation, and foreign currency shortages.

The currency issue continues to be a major headache for the government too. While the official rate remains at US$1:1 bond note, the reality on the ground is that the rate has quadrupled and the illegal foreign currency market continues to flourish.

It is our view that the governor needs to promote, in his MPS, financial and price stability to address the rising inflation on the back of the black market rate, multiple pricing, acute liquidity shortages, and rising domestic debt. Most companies require forex to oil their operations and are resorting to the black market where the greenback is readily available. Due to rising demand, the rate is constantly changing and companies are finding it hard to stay afloat. Currency fluctuations also make it virtually impossible to price commodities competitively hence the failure by some businesses to re-stock. On a broader macro-economic level, the country is not generating enough foreign currency from exports to satisfy demand and this has seen the central bank finding it difficult to spread the little forex in its reserves across competing demands from the fuel sector, food imports, the health sector and other critical areas.

Companies, particularly those involved in the mineral sector, have been complaining that the central bank has been short-changing them in terms of forex allocation as the energy sector gets the largest chunk because of the recent fuel shortages which crippled almost every economic sector. The governor must address these discrepancies and increase incentives to those entities whose performances have enhanced the economy, namely the mining, agricultural and energy sectors.

One way to boost the mining sector is allowing gold traders to directly sell their products to consumers who offer them hard currency and ensure the money is used locally. Some companies are folding as a result of foreign currency shortages and it is a worrisome scenario at a time when unemployment should be arrested.

In his last Monetary Policy Statement, Mangudya split bank accounts into foreign currency accounts (FCAs), foreign currency transactions (nostro FCAs), local bond notes and RTGS (real time gross settlement) transactions. It was a good idea, but generally it has not been bought by the business community, apparently because the FCA system will automatically devalue their “bond note” bank balances without compensation, even though at the time of depositing those bank balances, they were assumed to be at par with the US dollar.

In fact before November 2016 when the bond note was introduced, all bank balances were denominated in US dollars. Today, with the introduction of the FCA system, those bank balances have automatically become “bond notes” without any compensation, because the government insists that the rate is 1:1. This creates a crisis of confidence in the banking system and will not help the current situation. Therefore, the governor should rethink the issue of the bank balances.

We also expect the governor to pronounce when the tobacco season will open since it is one of the largest contributors to liquidity through attracting foreign buyers. Statistics from the Tobacco Industry and Marketing Board (TIMB) shows that the 2018 production increased to 240 million kg, setting a new record for Zimbabwe. Grower earnings for 2018 increased from $559m last year to $700m, while exports for 2018 to date have raked in $220m.

The general public expect that the central bank chief finds solutions to their problems that include soaring prices of virtually everything and bring stability to the economy. They also expect the prices of basic commodities to stabilise to suit their pockets that have been hit hard particularly by the steep increase of fuel which rose by 150% recently.

We believe if these problems are addressed in the forthcoming Monetary Policy Statement, our economy will take a positive trajectory towards recovery. The governor’s pronouncements must offer concrete solutions