Tough task for Mangudya

RYAN CHIGOCHE / NYASHA KUNYISWA

Reserve Bank of Zimbabwe(RBZ)  governor, John Mangudya,  faces a difficult task as he seeks to stabilise the market, which has faced strong headwinds amid calls by experts to abandon a fire-fighting mode in the Monetary Policy Statement expected next week.

The monetary policy will be presented against a backdrop of currency woes, which has seen the exchange rate going haywire in the past few months.

This week, the dollar was trading at between ZWL$230 and ZWL$240 on the parallel market from ZWL$200 in December 2021.

On the official market, the Zimbabwe dollar has also depreciated to ZWL$116.6 to the greenback this week from ZWL$106 in December last year.

Mangudya has to contain price instability which has seen prices of basic goods heading northwards amid fears it would fuel inflation.

Mangudya’s policy statement comes at a time when there is an outcry  over the inadequate allocation of foreign currency from the auction system.

The central bank is battling foreign currency allocation backlog with the Confederation of Zimbabwe Industries (CZI) this week saying it takes up to six weeks for successful bidders to  receive their allocations from the auction system.

The other challenge is to contain money supply growth, which  if not contained will result in inflationary pressures.

This appears to be a difficult call  for Mangudya amid fears of unbudgeted expenditures ahead of the 2023 elections.

University of Zimbabwe economics lecturer Moses Chundu said the central bank should desist from a “fire- fighting” mode as the markets will always “prove smarter than the institution”.

“The issue of the exchange rate has gotten so complex. At one point the talk was about fundamentals and we cautioned against falling for that narrative. Now after so much damage to the economy and people’s incomes and savings, the RBZ comes back and says the exchange rate issue is no longer about fundamentals,” Chundu told Business Times.

He said the solution lies in confidence-building.

“We surely cannot continue with the same system manned by the same bodies and suddenly expect citizens to start trusting that. (The governor) needs to make bold statements that send a signal of change otherwise pillow banking will continue to the detriment of the economy,” Chundu said.

He said the distorted official exchange rate has resulted in foreign currency shortages as demand  outstripped supply. Exporters were also being forced to surrender their foreign currency at the distorted rate.

Another economist, Canicio Dzingirai, said Mangudya should put in place measures to stabilise the volatile currency and price instability affecting the economy.

“Price and currency instability cannot be separated. The central bank must also give priority to producers so that they will be able to produce and import. Producers use producer price discovery. They look at the market and if the rate is skyrocketing, it results in price instability as they track the parallel market rate to price their products,” said Dzingirai,   an economics  lecturer at Midlands State University.

CZI president Kurai Matsheza said Mangudya should  come up with measures to curb money supply growth.

He also said  the governor should consider incentives for exporters.

“There is a need to increase the source of foreign currency which means those that export need to be incentivised to export more and bring in more foreign currency,” Matsheza said.

In addition to that Mangudya should offer attractive rates that will encourage holders of the foreign currency to willingly sell to the auction . The (governor)  should continue with monetary supply control.”

Another economist with a local bank , who requested anonymity, said the governor should deal with high interest rates.

“Interest rates were hiked to 40%. The idea was to discourage borrowing. But,  people  are borrowing at  between 50% and 60%,” said the economists.

“What the central bank did was to increase statutory reserves which had a major impact in terms of stifling  liquidity. This would have an impact especially because it meant that a lot of liquidity is now being kept at RBZ not the market.”

He said while there could be a lot of liquidity tightening  in the market some of the problems were “related to huge payments that have been coming through from government”.

“They may have tightened the capacity of banks to lend  because liquidity is now tight if government continues to make huge payments. This has been causing a lot of volatility  on the foreign exchange markets and this becomes a dilemma for Mangudya, said the economist.

“To contain money growth, the governor should  follow through on the quota fiscal operation (which they said were going to reduce) which are coming as a result of exchange rate misalignment,” he said.

Companies say they are taking about four weeks to get foreign currency allotted at the foreign currency auction system.

An economist with a leading commercial bank said Mangudya has to go back to basics and ensure the auction system allocates what is available.

“The impact will be an increase in the official exchange rate because it shows at current level demand is outstripping supply. So if demand is outstripping supply the price will go up in other words so in order to address the excessive demand we have to allocate what is available and the price will respond. If the price responds it will be good also for the exporter,” the economist said.

He said an overvalued exchange rate was overtaxing the generators of forex as they were selling at a sub optimum price  that undermines their viability.

“The governor should also allow even the bureaus to operate freely. They will act as your foot soldiers in terms of collecting a lot  of forex that is lying in the informal sector but it’s an issue of the right price,” the economist said.

The measures, the economist said, should be supported by the right monetary policy.

The huge injection into government operations is a huge problem and there must be a complete package where they tighten the banking sector policies and tighten government spending as well as it is the liquidity which causes problems, the expert said.

“Right now government is saying we need to advance infrastructure and things like that but we know that liquidity is the problem. So you may end up celebrating your reserve money target but it would already make the damage during the day so it becomes an indicator,” he said.