Eric Bloch Column

Positives and negatives of monetary policy

THE governor of the Reserve Bank, Dr Gideon Gono, continues to be the very deserved recipient of high commendations from almost all in both the private and public sector. Those commendations are founded upon recognition of his intense moti

vation to try to restore economic wellbeing to Zimbabwe, despite the myriad of potentially insurmountable economic obstacles and of overwhelming difficulties occasioned by circumstances virtually, if not totally, beyond his control.



The commendations are based upon awareness of his unbounded ability to work for hours and hours, and days and days, on end with disregard for consequential physical exhaustion, because of his anxiety to bring about economic transformation as rapidly as humanly possible. The commendations are also founded upon recognition of his willingness to consult, to seek guidance and advice widely, instead of an arrogant conception that he is all-knowing.



Instead, he readily acknowledges that none, including himself, can conceivably formulate and implement a vast range of diverse policies without some of them being either ineffective or insufficiently effective. He is prepared to accept that there must be an evolutionary process of monetary policy formulation where policies must be subjected to modifications, if necessary.



Thus when he presented his review of the first quarter of 2004 under the monetary policy which he had announced on December 18, that review was generally very well received. His audience in the RBZ auditorium, and his wider, nationwide audience via television and radio were, in the main, very impressed. They welcomed the depth of the review and the clear successes of some of the new monetary policy. And they welcomed the fact that he openly recognised that some changes to those policies were necessary, and that the successes to date were “modest” and only “encouraging pointers towards success”.



Amongst the “pointers” which he highlighted was the slight reversal to the hyperinflationary trend that had prevailed for all too long. Reflecting on that reversal, he drew attention to the fact that whilst month-on-month inflation had averaged 18% in 2003, and reached a peak of 33,6% in November, 2003, it “retreated to 13,7% in January, 2004, to 6% in February”, and a further slight deceleration to 5,9% in March. Moreover, year-on-year inflation had peaked at 622,8% in January, but fell to 602,5% in February and to 583,7% in March.



He addressed in some considerable detail, the pursuit of stabilising the foreign exchange regime and maximising the inflows and availability of critically needed foreign currency. In that regard he highlighted that in the first quarter of 2004 the delivery of gold to the mint was 5,13 tonnes, worth US$67,3 million, compared to 3,4 tonnes worth US$39,0 million in the first quarter of 2003.


Moreover, foreign exchange inflows amounted to US$333,5 million during the first quarter of 2004, as against only US$301,7 million for the entire 12 months in 2003.



But Gono also disclosed that he considered that the RBZ had also suffered some short-comings, stating that “as monetary authorities, we remain deeply remorseful over the failure of our systems to timeously and appropriately guide the market in areas of prudential financial sector management”.


He continued that: “With hindsight, we as the central bank feel that we could have guided the sector much better than we did, especially during the last half of 2003, when a lot of the short-earnings seem to have accelerated. We are taking self-corrective action in this regard.”



The humility of this self-recrimination was very highly regarded by the private sector, being so very different to experiences over the years insofar as the public sector’s prolonged belief of infallibility was concerned. After making this self-effacing admissions, the governor then enumerated, in very considerable and impressive detail, the remedial actions initiated by the central bank.



After a comprehensive review of the circumstances of Zimbabwe’s various economic sectors, the governor then identified how agricultural and mineral exports, value-added manufacturing and exporting of manufactured goods, enhanced tourism and accessing foreign exchange from Zimbabweans abroad would be essential elements for economic recovery. He urged that Zimbabwe needs to “export first in order to import”, and that to do so a paradigm shift is required, to which end he announced various new monetary policies, and modification of others.



These included that exporters who are able to achieve timely acquittances of export proceeds by way of advance payments and prepayments, the 20% mandatory sale of export proceeds to government would be transacted at the ruling auction rate, instead of $824 per US dollar, as previously pertained. These provisions would also pertain to tourism operators’ foreign currency earnings.



Concurrently, the entitlement to partial retention of export proceeds in Foreign Currency Accounts by exporters with approved extensions of acquittal periods was modified to aid such exporters, the 15% FOB Export Incentive Scheme was modified favourably from an exporter perspective, and a $5 200 to US$1 exporter floor price was introduced for the foreign currency auctions. Various other positive exporter support measures were also announced. Unfortunately, as meritorious as these measures and moves are, they will not suffice to restore fully exporter viability and achieve substantial enhancement of export earnings.



Many are under the erroneous impression that by virtue of their previous realisation of earnings through the parallel market, exporters were realising vast profits, but in most instances that is, or was, a far cry from reality. In practice, exporters have been subjected to massive cost increases over a very prolonged period of time. Responsive to pronounced inflation, wages were necessarily increased progressively to a very considerable extent.


Electricity charges soared upwards, to levels way beyond the scales of charges applying elsewhere in Sadc. Other costs similarly spiralled upwards. But exporters could not increase their foreign currency denominated selling prices, for doing so would have rendered them highly uncompetitive as against suppliers of like products operating in countries with markedly lower rates of inflation. All that could, under such circumstances, have maintained exporter viability, was a devaluation of Zimbabwe’s currency.


But government dogmatically and myopically refused to devalue. The result was that the only way whereby the exporters could survive was by achieving a de facto devaluation through parallel market trading. That kept them alive. It did not make them millions! That that is so is very evident from study of inflation — adjusted financial statements which demonstrate that most enterprises either sustained losses, in real terms, or at best attained very markedly reduced real profits.



And now, once more, they have been cast into a position that continuance of operations once again places their very survival in jeopardy. Although several measures announced by the governor are beneficial to exporters, the bottom line is that the benefits can only, in most instances, reduce losses, and will not restore profitability. The reason for this is that most exporters cannot access advance payments for their exports, or even any early payment after shipment, for foreign competitors are willing to extend credit to customers.



As a result, most exporters cannot benefit from the governor’s “carrot-and-stick” measures. They must surrender 50% of their export proceeds, realising a niggardly $824 per US$1 on half of that surrender, and $5 200 per US$1 on the balance. This yields them an effective blend rate of only $3 012 per US$1, which compares most unfavourably with the required effective blend rate of between $5 000 and $6 000 per US$1, previously attainable in the parallel market (and before recognising the further impacts of inflation upon exporters’ costs since the near demise of that market).



Also still embattled are those exporters who have an import content and/or other foreign currency denominated commitments which, as a proportion of export earnings, exceed the 50% of such earnings that most of them are entitled to retain in order to service their foreign currency inputs. As a result, they have to bid in the foreign currency auctions to obtain their additional forex needs. To all intents and purposes they are buying back their own forex earnings, with concomitent costs and delays, impacting negatively upon their operations. This too needs to be addressed.