Monetary policy statement, an admission of failure

On February 20, Reserve Bank of Zimbabwe governor, John Mangudya, issued his monetary statement which contained both admissions of failure in the economy and a topsy-turvy aspiration for an immediate better future.

The monetary policy statement was a clear indication that all is not well in the economy and huge challenges lie ahead with regards to reviving and stabilising the economy.

For an institution that works under an arrogant ruling party, the admission of failure is a new phenomenon.

There are interesting observations, especially from the introductory statement. The statement relies largely on diplomatic narratives to mask admission that the last quarter of 2018 was a failure.

However, direct admission would have provoked national debate on why and how the monetary measures, put in place in October last year, have failed.

Failure is not always a bad thing and can be a chance to start afresh and more intelligently. It is okay to fail and learn from past mistakes.

Part of being a responsible leadership, which is taking responsibility for failure and success, is to admit mistakes, learn from them to correct them.

Could this be what Mangudya and Finance minister Mthuli Ncube are up to in the coming few months? Only time will tell. For now, let's look at what the Reserve Bank of Zimbabwe thinks went wrong.

The statement begins by telling the nation what we have always known that the economy took a negative trajectory since October, which resulted in the current inflationary environment. Governor Mangudya told the nation that immediate redress is needed in order to restore value for money.

We all know that this was not breaking news. The protests that led to deaths of over a dozen people and injury of many after the deployment of soldiers in January were a result of these developments.

By the governor's own admission, the foreign exchange on the parallel market ranged from one US dollar to 1,40 bond note to 4 bond note. And this saw the year-on-year inflation rising from 5,4% to 20,9% in October and closed the year at 42,09%.

Both inflation and the multi-tier pricing system during the last quarter of 2018 resulted in price distortions largely driven by the various modes of payment. In other words, the situation was a free for all, simply implying that no one was in charge of the monetary system. That situation put pressure on the buying public and the country's balance of payments position.

Additional evidence by the governor suggesting lack of leadership, is found in his statement that, "the majority of transactions …[were] at an implied parallel market exchange rate of around 3 to 3,5 to the USD."

In this, we hear the governor noting the existence of a parallel market without highlighting its illegality. Instead of addressing this as a bad and illegal behaviour arising from bad policies, he instead hastened to highlight the bad results caused by the various parallel market exchange rates.

The challenges he highlighted include; multi-tier pricing by business, speculative pricing, loss of government revenue, valuation and accounting difficulties, asset-liability mismatches and negative investor confidence. Some of these are coping mechanisms purely for survival by genuine businesses, while others are as a result of opportunists taking advantage of the leadership void.

He further admits that if the current monetary arrangements, which he himself put in place, together with his team, are maintained, they could pose the risk of a costly re-dollarisation of the economy, which will move the economy into a recession. Again this is both confusing and evasive.

Is it the monetary arrangements or the behaviour arising from them that will push the economy into recession? Bad policies breed bad behaviour.

Our problems in Zimbabwe have never been lack of sound policies, but lack of commitment to implement and enforce them. Implementation and enforcement, in the context of our current monetary policy, is supposed to focus on instilling good or remedying bad behaviour.

The parallel market, which gave rise to a multi-pricing systems is symptomatic of a bad economy and is also a behavioural issue which should be addressed through law enforcement.

While we are aware that the entire economic rot is a result of bad politics, we did not hear the governor seeking the help of law enforcement agents to deal with the parallel market behaviour.

I am supposing that parallel market remains illegal in Zimbabwe and the governor's inability to call for the help of the police to deal with the practice suggests that there are bigger elephants in that arena.

And if that is the situation, then it means our leadership is not being honest to itself and the people.

Instead of confronting the real monsters in the monetary environment, the governor chose to tell the nation that the "introduction of a market-determined mechanism for trading of US dollars with RTGS balances and bond notes has become imperative."

Even as he prescribes this as a solution, he cautions that "without a formal guidance on the relative values of the RTGS, bond notes and the US dollars, the transacting public is currently being prejudiced through ad hoc pricing by businesses, which factor in different implied parallel market exchange rates in their pricing systems. This needs to be corrected."

Who should correct this?