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Q4 monetary policy review

Own Correspondent

THE Reserve Bank governor presented the fourth quarter monetary policy review on January 26. This review was meant to sum up progress made in 2004, and map the way forw

ard for 2005. While several achievements were attained in 2004, we can summarise these as being the arrest of the economic decline cycle that the country had found itself in, and the restoration of confidence in the economy. This was done through various means such as the introduction of the auction system, commencement of inflation targeting and the formulation of policies aimed at creating an enabling environment for economic recovery.

Our focus will be on the monetary policy statement’s outlook for 2005, initially from a macro-economic perspective, but later from the point of view of the investor. The year 2005 has been declared as being the ‘Year of Investment’, a positive sign for the investor, as this suggests that investor concerns will receive priority in the formulation of economic policies.

While the monetary policy statement has become an all-encompassing document (out of necessity, as pointed out by the Reserve Bank governor in the body of the statement), it is important to firstly look at the core area of monetary policy management, as this forms the backbone on which all other policies rest.

Inflation, accepted by most as the key measure of economic well-being, was tamed in 2004, notwithstanding the disputes over the accuracy or relevance of the CSO’s computation methods. For 2005, the governor identified parastatal and local authority restructuring as the determining factors in the inflation battle. It is a fact that our downward spiral was caused by the perennial government deficits due to uncontrolled expenditure, lack of foreign currency inflows, quasi-government institution’s inefficiency and poor monetary policy management. Negative sentiment also played a part in this development. It follows that these issues need to be redressed before we can make progress.

While success has been scored in controlling government expenditure, the current year’s budget, where expenditure is expected to rise by around 240% is a cause for concern, irrespective of it being ‘within budget’. Not much space was dedicated to this issue in the monetary policy statement, save to say that government was operating ‘within its means’. In the analysis of domestic credit, however, it was disclosed that government’s share of domestic credit had increased significantly in the last quarter of the year, a sign that government once again may be crowding out the private sector. We expect that funding of the government deficit, together with the $10 trillion parastatal and local authority facility will result in continued high interest rates, or high money supply depending on how the Reserve Bank decides to fund these commitments. Either of these situations is not good for the economy.

Foreign currency inflows into the formal market have improved, and measures have been put in place to improve these. The governor’s statement devoted a lot of space, and went into detail on various measures to address the issue of inflows. While the auction system is expected to continue in operation, greater emphasis will be placed on reducing the differential between the value of bids and the amount on offer. Targets were also set for the various exporting sectors up to 2007, and the ‘carrot and stick’ export incentives were enhanced in the exporters’ favour.
Specific sectors to receive attention were the horticulture industry, air freighting, the tobacco sector, the mining sector (platinum and gold), telecommunications, tourism and the various Homelink schemes.

Without going into detail on the various measures, we believe that overall the policy changes are positive, and in keeping with the twin objectives of containing inflation while at the same time maintaining exporter viability. Among the notable features on the governor’s foreign exchange inflow projections, though, was the absence of figures in the line for ‘Grants and other transfers’, which accounted for 21% of the inflows in 1996 (the base year).
The projections to 2007 show that without this line item, our foreign exchange inflows will not match those achieved in 1996 even up to 2007.

This presents a strong case for the need to engage the international community, and the governor mentions this further down in the document.

The commitment to repaying international creditors (who were paid US$45.5 million over the course of 2004) as well as continued engagement of the same is an indication of the importance the governor attaches to resumption of normal relations with these parties.

While promoting the current sources of foreign exchange is important, we believe equal emphasis should be placed in the areas of import substitution and value addition, to increase foreign exchange inflows and reduce demand for foreign currency. This would also address the need to support the youth and middle-aged through employment creation as well as reduce dependence on outside parties. There are several items imported into the country, which with a small investment in plant and machinery could be manufactured competently in Zimbabwe, and even be exported at competitive prices under the right conditions. Creation of schemes similar to the PSF and the ‘carrot and stick’ approach in these areas could help kick-start this area which appears not to be receiving the attention it deserves, given our desperate situation.

The governor’s statement dealt with the issue of quasi-government institutions’ inefficiency at great length. If the recommendations on this sector are carried out to the letter, this will address a major cause of structural inflation, which has been with us practically since Independence. It is worth noting that former parastatals that have been commercialised and privatised (Cottco, Dairibord and Zimre being examples) have since gone on to become blue chip counters on the local bourse. In developed nations, power, utility, telecommunications, airline and rail transport companies are run successfully as private enterprises, with no direct threat to national security having been observed in such arrangements. On the contrary, these organisations contribute tremendously to national well-being, unlike our case.

Monetary policy formulation and implementation has been the cornerstone of the turnaround to date, and its potency in addressing economic decline has been aptly demonstrated. The governor has indicated that the RBZwill continue applying this tool, and we believe this is positive for the economy. In this stage of the inflation battle, however, we believe it is the other areas above (containing fiscal spending, increased foreign currency generation, value addition and import substitution, and removing structural rigidities) that will play a more important role, particularly to get to the low two-digit, and eventually the single digit levels. Of particular interest was the robust analysis given of the causes of inflation (supply and demand side factors), and the steps to be taken to address each of these. In fact, this robust analytical approach, as well as internal consistency permeated throughout the entire policy document, indicating the scope and depth of the review process. Key monetary policy measures to be maintained included:

*Continuing reduction of money supply growth; down to 60% by end of 2005, and 14% by mid-2006;

*Tight liquidity management through open market operations and continued fiscal rectitude;

*Reduction of credit growth;

*Maintaining a strict accommodation policy for financial institutions, and

*Balancing of interest rates against foreign exchange market developments.

Also important is managing how the international community perceives the country. Violations of property rights, and more so Bilateral Investment Protection Agreements have done irreparable damage to the country’s reputation in the eyes of investors, and it is our fervent hope that the governor’s disdain and remorse over what happened will spread to the influential people in the corridors of political power. Nevertheless, it is imperative that we move forward, rather than continue to dwell on the past.

Apart from the fundamental issues discussed above, the governor also touched on various other issues, mainly of an administrative nature aimed at addressing shortfalls and loopholes identified, particularly in the areas of management of the financial system, and foreign exchange management. Some of these are:

*Telecoms operators to declare export proceeds like other exporters;

*Tourism external marketing agents, curio shops and other tourism services operators to be registered;

*Added details on the various Homelink initiatives;

*Details on the Enhanced Platinum Sector Regime;

*Revision of the gold support price from $92 000 per gramme to $130 000 per gramme;

*Tobacco prices and incentive structures improved, and loopholes in the marketing thereof plugged;

*Reduction in building societies’ statutory reserves to encourage construction of new houses;

*Opening of additional clearing houses in Gweru, Mutare and Masvingo.

Perhaps of interest to the investor community is that the Reserve Bank will now be actively involved with the Zimbabwe Stock Exchange in setting up electronic trading and a Central Securities Depository.

The governor finished off the MPS by recounting gains to date, and encouraging the nation to rally and look into ourselves for salvation. He also correctly points out that the battle is not yet over, and there are more tough times ahead. Perhaps to emphasise the fact that it will be more by faith that we get through, he committed the MPS into God’s hands, something last done by Dr Herbert Murerwa in his 2003 budgetary statement which preceded a wholesale deterioration in the economic environment.

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