By Taurayi Mushambi
WHO would have imagined that the scrambling for bread, mealie-meal or cooking oil and the long winding queues for petrol would come to an end so soon? This can only b
e reflective of the effectiveness of monetary policy.
Of particular interest is the significant decline in the annual inflation rate, which is seen as the number one enemy of the nation. The annual inflation rate fell from a peak of 622,8% in January to 251,5% in September, whilst the month-on-month inflation fell from a peak of 33,6% in November 2003 to 5,9% in September. This can be attributed to a number of factors.
First, a tight monetary policy. The decline in the annual money supply growth from 490,9% in January to 320,6% in August has helped in reining in inflation. Money supply growth has been contained largely due to stringent liquidity management via open market operations such as issuance of TB’s, Special OMO’s and Special TB’s.
Second is fiscal discipline as evidenced by government’s maintenance of a positive cash balance on their Reserve Bank account over the January to October period and thirdly, reduced growth in domestic credit.
Expansion in domestic credit to government and the private sector is a main source of money supply growth. This growth comes about through the credit creation process by commercial banks via the multiplier effect on the initial injection, which would lead to an increase in money supply greater than the initial injection.
Credit growth to government which peaked at 452,9% in January slowed to 90,5% in August while that of the private sector peaked at 682,1% in February and came down to 302,5% at the end of August.
Fiscal discipline is also needed to consolidate the disinflation gains made so far. This should be achieved through productive capacity-building expenditures, avoidance of unnecessary supplementary budgets and privatisation of parastatals which are overly-subsidised.
In line with Vision 2007 (inflation rate between 5 and 7%), the targeted inflation path is expected to lead to the convergence of interest rates (concessional and market rates) and of exchange rates (auction rate and parallel rate).
A dual policy regarding the two leads to arbitrage opportunities. Notwithstanding the resultant arbitrage opportunities, the central bank still sees it fit to maintain the dual policies in the short-term with a gradual convergence to market rates. With regards to dual interest rates, the central bank is trying to balance between increasing productive capacity and fighting inflation.
Concessional lending injects money into the system thus leading to money supply growth, which is inflationary, but at the same time is necessary to bolster the supply side. Thus as it is, until inflation levels decline sufficiently to let suppliers borrow at market rates, concessional lending will continue until June 30 2005 when all PSF monies must have been repaid.
Non-concessional lending interest rates are still required to trend at positive real rates of 10-20% above inflation, on an effective compounded annual basis. The problem is that such a facility is open to abuse, such as diversion of the funds onto the money market, not to mention the inflationary effect of the monies created. Thus there arises the need for the RBZ to carry out audits of the disbursed funds.
Coming to forex, the governor of the central bank said the auction is only managed to the extent of prioritising beneficial payment and not the rate itself. Prioritisation is made towards strategic needs such as fuel and raw material imports. But one cannot help wonder how the disparity in demand and supply on the auction market is matched with demand obviously out-weighing supply thus leading to the probable conclusion that the rate is also being managed.
The over-valued currency has been instrumental in the significant reduction in the inflation rate. We anticipate though that there will be gradual relaxation on the controls going forward.
The central bank has acknowledged the need to compensate exporters for the cost effects of rising domestic inflation, compensation that can be achieved by devaluation. Instead of devaluation the RBZ has put in place export incentives that should have the effect of lowering the cost base or raising effective revenues.
The incentives include provision of concessional financing, reduced forex surrender requirements at the $824/US dollar rate, allowance for exporters to issue post-shipment foreign exchange denominated bonds which should effectively boost revenue inflows and others. Whether or not the incentives will work effectively shall be seen but exporters would have wanted devaluation.
The diaspora floor price is going to be managed between $5 600/US$ and $6 200/US$ to January 31 2005. To further enhance inflows via the Homelink initiative, the RBZ has come up with a Housing Development Scheme to the tune of $750 billion. The funds accessed will be converted into foreign exchange at the ruling auction rate on the date of the transaction.
Hopefully, the guys in the diaspora will not think of converting their hard-earned currency at the black market rate and just buy houses on their own, but since the underlying bonds would be in foreign exchange and at mortgage rates prevailing in the foreign country where the Zimbabwean beneficiary stays, that might weigh to the advantage of the scheme since those rates are likely to be less than our own (local) rates in nominal terms.
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