Monetary policy review – too early to say ?

By Admire Mavolwane

LAST Wednesday’s statement turned out to be the proverbial fuel to an already raging fire. Since then the stock market has gained 31%, this despite weakening by 31 150,88 points thi

s Wednesday to close at 2 125 252,57 points.


The cut in the bank rate from 110% to 95% for secured lending, and further reductions being envisaged that by June 1 2005 should see the main rate in the country at 70%, left investors with no option but to switch from the money market into shares.


The governor dangled an even bigger carrot, with those non-horticultural companies acquitting their CD1s within 90 days retaining 70% in their FCA and liquidating the balance at the full auction rate. Horticulture’s carrot was a bit smaller at 45 days. The stick remained at 10% at $824 after 90 days. In effect the stick part of the scheme has been deleted from the equation.


The immediate impact of this initiative is to increase companies export revenues by 9,5%.With the virtual abolition of the $824 exchange rate, the focus then shifted to exporting counters Cottco, Tanganda, Ariston and Interfresh which gained 60%, 42%, 36%, and 28%, respectively.


Few captains of industry, however, have either the time or the inclination to read the whole of a 210-page document containing nearly 100 separate items with 3 annexures giving information on 10 troubled banks and lists of over 120 contributors or advisors to the statement. Even fewer are likely to devote their attention to the details of exchange control administration directives or production targets and extortions on improving efficiency, particularly when they related primarily to the public sector and local government.


The area to examine for what practical implications the statement has for the conduct of business are thus likely to be delegated to specialists and advisors so that it will be some time before the contents of such a massive work will be fully digested.


This may, admittedly, be to the disadvantage of some enterprises or individual firms in some sectors but it suggests that the Governor does not do himself any favours by attempting to cover so much territory at one time. His efforts may therefore fall short of his very lofty expectations for promoting a speedy economic turnaround.


Narrowing down the analysis to manageable proportions, so as to facilitate concentration upon what can be gathered about the three generally accepted concerns of monetary policy, namely, money supply, interest and exchange rates, initial reaction must be that little has in fact been changed despite the massive commentary represented by the January statement.

With regard to money supply, the basic objective is to reduce annual broad money (M3) growth from an estimated 150% in December 2004 to 60% by mid — 2005. Since most people believe, with varying degrees of conviction, that the rate of growth in money supply has a bearing on inflation the Governor’s proposals in this respect will be generally welcome.


A degree of uneasiness, however, creeps in once the likely extent of public sector spending growth in 2005 is taken into account. Spending in terms of Parastatal and Local Authorities Reorientation Programme (Plarp); increases in civil service remuneration; budget tax concessions; quasi fiscal support for selected exporters; the establishment of the Zimbabwe Allied Banking Group; the Productive Sector Facility and the facility proposed through the agency of the Energy, Housing and Infrastructure Development Bank together constitute an additional $23-25 trillion expansion in spending this year.


This is considerably more than the $19 trillion increased expenditure proposed in the budget estimates suggesting that the true budget deficit will be much more than double the 5% of GDP envisaged. This looks hardly likely to reduce money supply growth or inflation.


The projected over 30% reduction in the structure of interest rates, while undoubtedly welcome to borrowers and spenders is unlikely to reverse the shift of resources from investment to consumption and will also boost money supply growth which cannot all be neutralised through statutory reserve payments or open market operations without negating the whole purpose of the reduction in rates.


While an arithmetical case can be advanced for an “exporter friendly” exchange rate of 595% in 2005 the indicated extent of the decline in inflation is increasingly questioned by professionals and at variance with a growing body of empirical evidence which suggests that even export sector profitability has not been growing at anything like that rate in real terms and that the viability of the non exporter and public sectors is increasingly being threatened.


The situation cannot be held together indefinitely by the extension of what are in fact even more multiple exchange rates — this time to platinum producers — without introducing even more distortions in resource allocation inimical to the effective workings of the economy as a whole.