The Monetary Policy Statement

Yesterday the Reserve Bank Governor gave a long-awaited monetary policy statement.  This had been expected in January and was postponed several times because of disagreements in Government as to what should be announced. The Minister of Finance has been following a carefully crafted reform program to restore fiscal and monetary stability within the framework of sound macro-economic conditions.

Eddie Cross

When he first came into office I warned him that when he walked into his office, that a bucket full of nasty stuff would fall on his head. It was no understatement. He found that the Reserve Bank was in a complete mess, the Government was spending 40 per cent more than they were collecting and all macroeconomic indicators were so far out of kilter that the State was in crisis. He took immediate steps to stop the bleeding – raising taxes and imposing strict budgetary discipline on all Ministries and Parastatals.

The result stunned everyone – including the Minister. The fiscal deficit vanished and since that time (7 months) we have been running on a surplus over expenditure. The impact was felt throughout the economy – money supply stopped growing and the macroeconomic fundamentals stabilised. He next stated that the RTGS dollars that everyone was using bore no relation to the US dollar. The informal market reacted with shock and the market rate shot up to 7:1 in a few weeks, forcing up import prices and giving rise to hyperinflation.

He next granted everyone the right to hold any hard currency balances in a special foreign currency account at their banks. Initially people and companies were deeply suspicious of these accounts but slowly they began banking any foreign currency earnings or receipt’s in such accounts. Today we have about US$700 million in these accounts and this, in some way, encouraged the Government to start the liberalisation process. In the meantime, inflation was reaching hyperinflation levels and this was in turn boosting fiscal revenues and reducing the real value of the mountain of electronic money created before the changes in August 2018.

The next step was to start the process of taking the country towards a more open and market driven economy where the value of the currency in circulation would be established by market forces. The first question people asked was “do we have a currency”? The answer was “of course” – but it was described by economists as “RTGS” dollars. This was in reference to the fact that it was based on an electronic clearance system called the “Real Time Gross Settlement” system. In other words, it was electronic money, backed by nothing except local sentiment. The other currency was the so called “Bond” notes and coins. Although in limited circulation this was the only local currency available for local transactions.

As with any currency, if you create or print money in excess of transactional needs you automatically reduce its value. This is what has happened to both the RTGS dollar and the Bond notes. By running up a huge fiscal deficit and creating electronic money to fill the gap, we were once again printing money in excess. The inevitable happened – the currency crashed and everyone thought that we were back in the bad old days when our domestic currency, the Zimbabwe dollar was destroyed and all savings wiped out.

However, this time the situation is quite different in that the Minister has forced the Government to live within its means and slowly stability and low inflation levels are returning as the fundamentals are addressed. The next step would be to create the conditions for growth, led by our export industries. This has proved to be difficult to get past the power brokers in the system. The reasons are many.

First we have to understand that a great many people in the State and the private sector were feeding off the system of exchange controls introduced by the Government in 2014. This entailed taking over US$3 billion a year from the earnings of all exporters and sweeping it into the Nostro (foreign currency) accounts of the Reserve Bank at the artificial rate of 1:1 with the US dollar. Initially this was not a problem as real market exchange rates were at that level. But as the State printed money, so the real exchange rates widened and when inflation started driving up costs, exporters were unable to cover their costs from the proceeds of sales.

Exports began declining seriously in late 2018 and are now well below what they were a year ago. Some exporters were threatening to close operations until this destruction of value was remedied. At the same time the availability of this very considerable sum of money (US$3 000 000 000) was available at the Reserve Bank at a third of its real value and the opportunities for corruption and allocations on a distorted basis expanded exponentially. Goods imported using these cheap dollars (fuel, wheat, cooking oil, pharmaceuticals and electricity) were available at a third of their real value and demand soared. Shortages and queues followed.

These conditions formed the backdrop to the monetary policy statement this week. I had hoped they would do the sensible thing – scrap exchange control and allow exporters to retain 100 per cent of their earnings, open up the money market to allow the formal sector to trade foreign currencies against the US dollar and the Rand and let the local currencies in circulation find their own level. In my view had this been done the currency would have traded at 2:1 or slightly more, inflation would have declined to below 5 per cent per annum in the third quarter of the year and shortages would have vanished. In addition, our exporters would suddenly be flush with cash and exports would expand rapidly, we would become a relatively low cost tourist destination and remittances would increase. Rapid overall economic growth would have followed.

It was not to be and what we got was a partial fulfilment of the above. The Governor allowed the float, but retained the sweep of exporters’ earnings into the Reserve Bank accounts. The only concession I saw was that the Bank would now pay 2,5:1 for this currency – reducing the massive destruction of value that the old system prescribed. He fixed the exchange rate at 2,5:1 against the US dollar and claimed he had enough reserves to hold the rate against this peg. This I doubt very much and I predict that the peg will not last long against real market forces.

But it is a massive step in the right direction and I am sure more reform is inevitable. The Minister described the statement as a real step forward, but I cannot believe he is totally satisfied and the outcome will prove him right.

What the Reserve Bank Governor did not do was to clear up just how we were going to meet the very real need for a new local currency for exchange purposes. Anyone visiting Zimbabwe is always astonished at the long queues for currency outside all Banks. This has to be dealt with and the only way to do so is to issue a new currency. I have argued that many times in recent months and almost always face opposition with people saying that the currency will collapse as it did in 2008. That is simply not true – our current currencies are in fact quite stable at about 4:1 and have remained so now for months.

Issuing a new currency about mid-year will strengthen the Reserve Bank and eliminate queues. It will also become a sound basis for pricing in local currency and make the multicurrency system redundant eventually. The key to success in that respect is the Ministers idea of a professional and independent Monetary Policy Committee to control and manage the new currency.

If we can get all this right, the people of Zimbabwe will do the rest. After all these years of corruption and failed policies, we deserve a new day.

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