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Assessing the latest Monetary Policy Statement

03 Mar 2020 at 07:50hrs | Views
The Reserve Bank of Zimbabwe (RBZ) delivered its first monetary policy statement for 2020 (On 17 of February 2020) with an impetus on stabilizing prices and the exchange rate. The central bank delivered the policy with an acute sense that its policies have been at the heart of the nation's economic decline and erosion of income for citizens and the corporate sector alike. The local economy has lost significant value due the ban on multiple currencies and subsequent introduction of the mono currency in June 2019. Official inflation figures for January show Year-on-Year (Y-O-Y) inflation soaring above 473%, while independent analysts point that inflation is around 620%. The Zimbabwean Dollar has lost 92% of its value with the Interbank market currently trading at 1US$ to Z$17.99 while the parallel market is trading at 1US$ to Z$31. Prices for goods and services continue to surge with the movements on the parallel market showing the level of disconnect between official figures and market trend. Confidence in the economy continues to decline with Foreign Direct Investment (FDI) inflows plummeting from US$717 million in 2018 to US$259 million in 2019, while portfolio investments (Purchases of local financial securities and equities) plunged from US$54.7 million to US$3.7 million.

In 2019, Reserve Money (Currency in circulation plus deposits held by the central bank) jumped from Z$3 billion to Z$8.8 billion driven by export retention financing and funding for various subsidies such as fuel, wheat, electricity, maize, cooking oil among others. Despite claims of fiscal surpluses by the treasury and purported restriction of revenue mobilization to issuance of Treasury Bills (TBs) worth not more than Z$1 billion, the central bank printing machine continued to work overnight to bankroll government subsidies. The trend on export retention financing and subsidies is expected to continue beyond 2020 as authorities continue to disregard free market forces that are fundamental to the recalibration of the economy.

As a move to guarantee productive borrowing in the economy, the central left interest rates unchanged at 35% despite pressure from lenders to hike the overnight rate in line with inflation. Productive lending in the economy has gone down to unproductive levels as measured by the loan-to-deposit ratio of below 37% as of December 2019. The low interest rates in an inflationary environment will further reduce lending appetite for local banks and financial institutions especially to the local industry which is hamstrung by a decline in earnings. To its credit, the bank is increasing the Medium-term Bank Accommodation (MBA) window to Z$1.5 billion (from Z$800 million) so as to support productive sector lending.

On money supply, the apex bank announced that it is going to use various monetary instruments such as Bonds and TBs to stabilize exchange rates through mopping up excess liquidity in the market. This is critical considering the fact that 50% of the total bank deposits of Z$34.98 billion are owned by 200 entities. This state of affairs leaves the local exchange rates very susceptible to upsurges if a few of these entities decide to use their disposable funds on the open market. The bank also announced that it will induce more notes into the economy gradually to increase on the Z$1.1 billion currently in circulation. Zimbabwe has been grappling with cash shortages for the past 5 years with banks currently limiting cash withdrawals to Z$300 per week (US$15) despite the high inflation levels that render the amount insufficient for use by ordinary citizens who find groceries cheaper to buy through cash from cash and carry retailers. The bank intends to introduce higher denominated notes to match optimal proportions of 10% of broad money supply, however the market hopes that the bank will adhere to its earlier plans of exchanging electronic balances for notes so as to manage inflation.  

In line with stabilizing the financial sector, the bank announced US Dollar indexed capital requirements that compel all foreign banks and large commercial banks to have capital of US$30 million by 31 Dec 2020. Commercial Banks, Merchant Banks, Building Societies, Development Banks, Finance & Discount Houses; Micro-Finance Banks and Credit only micro-finance institutions should have US$25 million, US$5 million and US$25 000 respectively. The indexing in US Dollar clearly shows direct contradiction to the central bank's assurances that inflation is under control and that the de-dollarization strategy is on track. The bank simply had no confidence in setting the minimal capital requirements for banks in local currency, just as much as local retailers and other market agents display the same behavior.

On de-dollarization, the bank continues to exhibit denial (possibly outright deceit) on events on the ground that led the government through Zimbabwe Revenue Authority (ZIMRA) to demand taxes in foreign currency from producers who are selling in foreign currency. The central bank points that Zimbabwean Dollar transactions reached Z$460 billion while foreign currency (FCA) deposits went down to 37% (US$785 million). The central bank is ignoring the fact that trading in foreign currency is prohibited by the law as such most transactions in foreign currency are not disclosed for tax evasion purposes and to deliberately pay statutory taxes in a weaker local currency when they fall due.  
Further, the Zimbabwean Dollar has astronomical velocity because of high inflation which closed the year at 521%. Simply put, the local unit is a transacting currency which every rational economic agent disposes of before it loses value while the US Dollar is preserved and used for asset preservation. This explains why the central bank itself could not set minimum capital requirements in a local currency because it does not preserve value. Foreign currency in the formal and informal market is not being banked and the government has limited means to track these transactions especially in the sprawling informal market where de-dollarization never really happened. The fact of the matter is that Zimbabwe is partially dollarized and those trading in local currency (even at cross rated prices) are simply doing it out of fear of government retribution. The government has started licensing various petroleum companies that intend to sell fuel in foreign currency as a way to alleviate the persistent shortages. The petroleum companies join a host of other producers who were exempted as far back as June 2019.

The monetary policy was silent on measures to improve liquidity on the interbank market despite the foreign currency shortages that are grinding local production to a halt. The interbank market is inefficient and most producers are failing to access foreign currency on the interbank market, leaving them at the mercy of the parallel market dealers. The central bank was also widely expected to review the unsustainable foreign currency retention thresholds so as to curb smuggling of Gold and other precious commodities out of the country. This too was not addressed to the dismay of local manufacturers, miners and tobacco farmers who account for the bulk of the country's foreign earnings. Economic output is thus forecasted to decline further, just as the industry capacity utilization is predicted to fall below 27% in 2020.

Overall, uncertainty reigns supreme in the market and confidence is at an all-time low. The monetary policy did little to fully address current challenges such as high inflation levels and currency instability, three tier pricing, cash shortages, low import cover, foreign currency retention bottlenecks and the subsequent low levels of liquidity on the interbank market. However there is comfort for holders of free funds and foreign currency account deposits as they will continue to trade freely on the local market.  Quasi fiscal activities such as incentives for Gold producers and import subsidies for various commodities will continue to put pressure on the central bank to print more money. Similarly fiscal pressures from treasury to fund government consumption and finance the budget deficit through issuing TBs will continue to exert more pressure on the bank. The targeted 50% inflation rate remains a pie in the sky as long as export retentions are financed through money printing, while the productive sector is getting less than 10% of their foreign currency needs on the interbank market. Demand for foreign currency on the parallel market remains very high, hence inflation is anticipated to remain higher than 400%. High inflation is providing fertile grounds for rapid re-dollarization.

Victor Bhoroma is a freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or follow him on Twitter @VictorBhoroma1.

Source - Victor Bhoroma
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