Economy not driven by monetary policies alone
By Eric Bloch
THE Governor of the Reserve Bank of Zimbabwe (RBZ), Dr Gideon Gono, took most sectors of the Zimbabwean economy and of society as a whole, by surprise when he p
resented his mid-year monetary policy statement last week.
Having given an unscheduled statement on May 19, hardly anyone envisaged that another statement would be forthcoming within two months. Almost all overlooked that. In terms of the Reserve Bank Act, it is mandatory that there be a statement reviewing monetary policies (and their economic inputs) in June/July and in December/January, addressing the preceding six months, and identifying any new monetary policies as may be required, or any modifications necessary to the prevailing monetary policies.
However, as soon as an awareness developed of an imminent monetary policy statement about 48 hours ahead of the event, Zimbabwe’s ever-fertile rumour machine activated at full speed. Rumours ranged from unfounded assertions of new collapses in the banking sector to expectations of withdrawal of bearer cheques and the introduction of a new currency. Inevitably, there was much speculation as to exchange rates, and possible measures to address the very pronounced scarcities of petroleum products.
No matter the nature of the rumours, with almost all that were negative in nature being accepted as fact, whilst any with positive characteristics were cavalierly dismissed as unfounded, the one common perception (or expectation) of most of the population was that the governor was responsible for the total turnaround and transformation of the Zimbabwean economy, and that his monetary policies should achieve that metamorphosis.
Admittedly, as he has emphatically demonstrated that his first and foremost wish is to bring about such a turnaround, he has correctly not concealed that, no matter how well-conceived monetary policies may be, they cannot function in isolation to the benefit of an economy. They are an essential facilitator of economic well-being, but they must be complemented by an economically conducive environment, which necessitates that the policies and actions of government must be constructively aligned with the monetary regime, and that the fiscal policies must reinforce monetary policies, and vice-versa.
Regrettably, since 1997 such an environment did not exist, and the non-monetary policies were economically destructive, instead of positive. That has been especially so insofar as the ill-conceived land reform programme, international relationships and constrained fiscal outflows were concerned. Despite that, Gono has striven vigorously to facilitate the economy and to offset negatives of the political and fiscal environment.
During the approximately 19 months that he has been in office, he has toiled, with remarkable energy, in his determined efforts to halt adverse economic decline, notwithstanding that much of what he sought to do was prevented by circumstances beyond his control, in general, and by many governmental acts of omission and commission in particular.
In essence, as far more of his monetary policies were constructive than those that were not, Gono’s measures have slowed down the economic collapse, notwithstanding that despite the slow-down, the state of the economy is horrendous. Albeit that some of the measures, despite being well-intended, had some very negative consequences (such as the reduced foreign exchange retention rights of exporters, and various “name and shame” campaigns), nevertheless a majority of the RBZ policies did contribute to minimising economic negatives, and to diminishing the pronounced economic hardships of the population from being even more pronounced.
Much of the same applies to the monetary policies announced by the governor on July 21. Very courageously, in view of the renowned political opposition to currency devaluation, he moved the base rate of exchange from US$1:$9 000 (as fixed on May 19) to US$1:$17 500. Even if related, more realistically, to the weighted average auction rate, he effected a devaluation from approximately US$1:$10 800 to US$1:$17 500.
This was a move which, even if not totally so, moved the rate to somewhat more realistic levels. Inevitably, importers are unhappy with the rate movement. However, exporters welcomed the change, although their joy was muted, for the discontinuance of the 25% FOB export incentive (which based upon the new rate, had a value of $5 400:US$1) significantly reduces the benefit of the devaluation. Hopefully the fiscus will compensate by an appropriate enhancement of fiscal export incentive.
Of very great importance in the monetary policy statement was the governor’s announcement that, by no later than September 30, 2006, banks and almost all classes of financial institutions must increase their capital base ten-fold.
Since becoming RBZ governor, Gono has shown his resolute determination to enforce absolute good governance and compliance with the highest of international standards of prudency. He is rigidly resolved that depositors must be fully protected, and that all can be unreservedly confident of the security of all within the banking sector. The increased minimum capital levels give due cognisance to the magnitude of inflation over the last few years.
Gono’s recognition of inflation, and of its very negative effects upon the economy, and of the misery that it inflicts upon most of the populace, has been pre-eminent ever since he became governor, and continues to be so.
He has energetically tried to curb money supply growth, being one of the greatest triggers of inflation. His efforts have been rewarded to the extent that such growth has more than halved over the last 18 months, from 491% in January 2004 to 235% in May this year. But that growth is still too great and is primarily fuelled by excessive governmental spending.
Credit to government rose by approximately 343% since January 2004. The governor, at risk to himself, has yet again strongly cautioned government as to the irresponsibility and consequential disastrous economic repercussions, of its unsustainably great spending (which spending will now be exacerbated by the necessary Operation Garikai, by the president’s recent appointment of additional ministers and deputy ministers, by the intended establishment of a Senate, over and above the high cost of food imports necessitated by foolhardy land policies, maladministration of agriculture and dogmatic resistance to reasonable conditions attached to international food aid).
In order to curb money supply growth and give appropriate recognition to inflation, the governor announced an immediate increase of 20 percentage points, to the RBZ secured and unsecured accommodation rates, which he increased to 180% and 190% respectively. This will force up market interest rates, which may distress borrowers, although economically realistic, but will undoubtedly please depositors in general, and pensioners in particular.
The governor was inevitably very conscious of the critical need for markedly improved foreign currency inflows. It was with that in view that he endeavoured to restore, or increase, exporter viability, although it is very regrettable that he has again reduced the extent of permitted exporter retention of foreign currency earnings (other than from incremental exports).
He was especially conscious of the extent that gold production can address Zimbabwe’s foreign currency needs and therefore increased the Gold Support Price from $175 000 to $230 000 per gramme which, over and above the depreciated exchange rate, should assure viability and growth of the gold mining sector.
Also very commendable, within the new monetary policies, is the facilitation for motorists, on a “No questions asked” basis, to access fuel against foreign currency payment.
Although this cannot address the needs of all, many Zimbabweans with relations abroad, others with “free funds” in foreign currency accounts (FCAs) and subsidiaries of foreign holding companies, will be able to access fuel from designated service stations, with effect from August 1.
This will not only benefit those fortunate enough to access foreign exchange, but also others, for by servicing the needs of those with forex, there will be a lesser demand upon the fuel imported with funding from the country’s foreign exchange resources.
What is critically needed is that government align its policies with economic needs. Were that to happen, instead of endlessly catastrophic policies and actions (such as Operation Murambatsvina), alongside the monetary policies, Zimbabwe would progress to economic well-being.