Monetary policy: the pros and cons
By Eric Bloch
IT was inevitable that, as with his previous four statements on monetary policy, some would welcome Dr Gideon Gono’s pronouncements in his 2005 Monetary Policy Statement and his 4th Quarter
, 2004 Monetary Policy Review,some would be disappointed in their expectations not being fulfilled, whether wholly or partially, and yet others would be scathingly critical.
It is impossible to please all the people all of the time, and others even some of the time. It was also inevitable, although very regrettable, that some would focus on his statements solely from a point of view of attaining maximised political advantage. In that respect, the ruling party and the principal opposition party are equally at fault, and they both chose the Reserve Bank governor’s latest statement as ideal ammunition with which to denigrate the other or to elevate themselves with the electorate.
The ruling party’s propagandists unhesitatingly lay claim to the credit for the very significant reduction in the year-on-year rate of inflation from its all-time high of 622,8% in January 2004 to 132,7% in December 2004.
In reality, the only minimal contribution to the containment of inflation as can be attributed to government is that it had somewhat greater fiscal discipline in 2004 than in prior years, and hence did not recurrently overdraw massively with the Reserve Bank (although to no small extent it did so at the expense of the private sector by resorting to prolonged delays in effecting refunds of Value Added Tax, Income Tax and Customs Duties).
Beyond that, government did naught constructive to contain inflation, and in fact may well prove to be the root cause of a possible upturn in inflation rates in 2005.
That upturn may well arise due to an undoubted need to import quantities of food as, with its disastrous implementation of the land reform programme, Zimbabwe has lost its self-sufficiency in food and, as government arrogantly advised donors that food aid would not be required, Zimbabwe may well have to fund much of the very necessary imports, at great cost, with consequential inflationary impacts.
Government has also contributed to inflation with the magnitude of non-performance related increments for the public service, and its largesse to chiefs and headmen in order to motivate support in the forthcoming elections.
The reality is that the most impressive decline in inflation was almost wholly achieved by the Reserve Bank, although at very great cost. The principal vehicle for inflation reduction was exchange rate containment, but that did repercuss very negatively upon the export sector, which lost price competitiveness in export markets as production cost increases were not adequately compensated for by exchange rate movements and export incentives (inclusive of concessional financing facilities).
Other avenues traversed by the Reserve Bank in its vigorous endeavours to contain inflation were to pursue interest rate reductions on bank financing of commerce and industry, and pressure upon parastatals to cease quenchingtheir ravenous hunger for revenues by excessive increases in charges.
Despite the Reserve Bank’s commendable efforts in that direction, some of the parastatals irresponsibly increased their tariffs or charges to unjustifiably excessive levels, failing which inflation may well have fallen further, and exporters could more readily have achieved viability.
Thus, in all material respects, government was not an instrument in the significant reduction of inflation, and its endeavours to claim credit for that reduction is spurious, being almost totally without justification. That is especially so as, were it not for government, inflation may well have fallen further. However, the criticisms and attacks by the opposition are equally uncalled for. Its spokesman has alleged that the 2005 monetary policies are structured as an election device for the benefit of the ruling party. Were that the case, surely the governor of the Reserve Bank would not have attacked the government’s sacred cow, being its programme for acquisition, redistribution and resettlement of, and on the land.
In no uncertain terms the governor criticised the acquisition of farms protected by bilateral investment agreements. He emphasised that Zimbabwe needs “to honour and respect bilateral, as well as multilateral international investment protection agreements”, and welcomed measures to ensure “ that the sacrosanct nature of private property and property rights is observed across all sectors of the economy, in conformity with best standards and international agreements”.
Similarly, it defies credibility to accept that the statement was election-driven when regard is given to his outspoken criticism of government’s other sacred cows — the parastatals. So forthright was he that the five ministers present at the presentation of the statement nearly turned white with shock.
Government has for all too long regarded the parastatals as its untouchables, reversing itself on its previous repeatedly declared intentions to privatise them.
But, disregarding their “protected” status, Gono stated categorically that: “a fishbone analysis that tracks the routing of the veins and tentacles of parastatals and local authorities in the wider economy clearly shows that for the country to elevate economic performance to the envisioned levels, these entities need to be radically “de-clogged” to hive off structural rigidities in their operations.
He stressed that “radical restructuring and re-orientation of the country’s parastatal… sector is an indispensable prerequisite for achievement of the objectives of the monetary policy.” He certainly did not mince his words, for in no uncertain terms he accused the parastatals of “operational inefficiencies and generally run-down conditions.”
In that regard, he noted “with grave concern that key institutions that ought to be at the centre of co-ordinating and building productivity capacities in agriculture, such as Arda, DDF, Arex and GMB, among others, are following a splintered approach that threatens to undermine achievement of targeted positive overall GDP growth”, and he called for radical transformation. Attacking such governmental entities is surely not a sound strategy to influence the electorate to favour the party which comprises the government that is possessed of such mismanaged and
ineffectual, counter-productive parastatals?
So determined were some to belittle the statement and to perceive it as being an election ploy, that they even implied that its delivery had been intentionally delayed, with barbed insinuations that the delay was driven by sinister electioneering motives. The reality is that the 3rd Quarter Monetary Policy Review was on October 26 2004, and the now maligned recent statement was on January 26 2005. So it was no later than the predecessor statement and, in fact, all statements since the governor came into office were in the second-half of the month following upon quarter’s end.