Monetary Policy just old wine in new bottle

By Tendai Biti

THE long-awaited monetary policy announced by the Reserve Bank has come and gone. Within the heat and emotion of Gideon Gono’s lengthy address, the question to be asked is whether it deals ade

quately with the issues of substance that will carry Zimbabwe forward.


MDC has always said that no amount of tampering or even gymnastic reform of economic parameters will succeed in this country while the substantive issues of governance, the rule of law, constitutionalism, legitimacy and social justice are not addressed. The governor’s statement was not expected to address these issues and did not do so.


Secondly, monetary policy is at most a component of an entire macro-economic strategy. Within the context of a turn-around strategy or a stabilisation programme, monetary policy is a prisoner of the more important fiscal and supply-side issues. Herein lies the Achilles heel of this much hyped monetary policy.


In our critique of the recent budget statement, we stressed that the budget had failed to address the key macro-economic issues of interest rates, exchange rate and inflation, as well as meeting requirements for investment and growth. We will examine and put the Monetary Policy Statement to the test on the same key issues.


Interest rates


On interest rates, the governor endorsed continuation of the two-tier system – this despite the admission by the president in his speech to parliament (acknowledged by the governor) that the two-tier system has not worked.

The system is supposed to provide cheap credit to productive ventures while providing market-related rates for borrowing for consumptive or speculative purposes.


But as the governor well knows, money is fungible. Borrowing for one purpose frees up resources to be used for other purposes. The governor says that it takes a year for new policies to work. But we’ve had three years of extremely cheap borrowing for productive investment and during that time the economy has shrunk by 26%.


No amount of supervision, exhortation or threats will achieve the objectives the governor claims to be pursuing. He was until last month a banker himself, so he knows better. The ranting about patriotism and so on in his speech is part of disguising the statement’s lack of substance. It is just populist posturing intended to please his political masters.


What is welcome is the governor’s drive to stop banks from misusing resources that are supposed to accommodate short-term liquidity problems. In his short tenure in office so far, he has refused to automatically accommodate the market to resolve liquidity problems. Money market rates have thus risen to unprecedented levels (500-600%).


As a result, at least four banks with poorly structured asset portfolios are already technically insolvent. Their inability to meet their obligations cannot continue for very long. The acid test for the new governor will thus very soon arise when he has to choose between allowing a bank to go bankrupt or to pump liquidity into the market and thereby exceed his money growth and hence inflation targets. It seems very likely that it is the monetary policy targets which will be foregone.


Exchange rate


Turning to the exchange rate, the crucial question is whether the newly-announced “controlled auction” will increase the flow of foreign currency to the economy. “Controlled” and “auction” are not words which sit together easily, so exporters will certainly be sceptical. Importers will also be frustrated at it seems that embedded in the auction proposals, is a very stringent form of import control.


Exporters will also take note of the fact that they still have to surrender 25% of their proceeds at $800/US$ and that 50% of their funds have to go into FCA accounts. Given that this government has previously removed FCA account privileges, many exporters will be understandably hesitant to commit themselves to this system.


These are the costs of the policy inconsistencies and reversals that both the Minister of Finance and the governor have decried in their recent public speeches. The propensity of the authorities to inconsistency is accentuated by the removal of privileges from EPZ companies. The governor was at pains to say that foreign-owned EPZ provisions were not being changed, but given the selective treatment of foreign investment guarantee agreements, this is small comfort to foreigners. The lack of sincerity, credibility and consistency is evident. Furthermore, in changing the rules for domestic companies only, an unacceptable and unnecessary disadvantage for domestic firms as compared with their foreign counterparts has been created.


Only those exporters who feel they can’t get away with it will submit to the controlled auction. Other remittances of foreign currency – including the huge sums from expatriate Zimbabweans sending money back to support their families – will continue to keep a parallel market alive. The parallel market means no surrender of 25% to RBZ at $800/US$ and no bureaucracy. As their relatives back home have been impoverished by the government’s destructive economic policies, the least the expatriate Zimbabweans should demand is the full value of their remitted income.


Inflation policy


The most damning aspect of the Monetary Policy Statement is that it does not contain any tangible or credible anti-inflation strategy. The governor’s stating that inflation will fall to 200% by December and to single digits by 2008 is pure “visionary” wishful thinking. The actual announced policies constitute a continuation of the pro-inflationary macro-economic stance that has caused the dramatic rise of inflation that Zimbabweans have had to endure over the past few years.


The main underlying inflation driver is the large budget deficit of 7,5% of GDP, a level which in other contexts would be regarded as totally unacceptable and highly inflationary when financed entirely from domestic resources. The governor acknowledges as much in his statement, giving special emphasis to the need for the budget to be managed so that the deficit is no larger than the budgeted amount.


The auction system for 75% of the foreign currency that comes through official channels may ease some of the foreign currency distortions, but the auction exchange rate will be market determined. This is in effect a legitimation of parallel market operations, but with the cost of continued depreciation of the Zimbabwe dollar, and hence continued increases in import prices. As Zimbabweans are painfully aware, one of the main drivers of inflation has been rising import costs due to devaluation. The policies announced in the monetary statement ensure that this is set to continue.


In respect of interest rates, the policy of suppressed rates is to be maintained for certain types of borrowing, with high interest rates being used principally (but dangerously) to discipline the banks. High interest rates are a necessary part of an anti-inflation strategy, but are not sufficient by themselves. They need to be part of a coherent, properly co-ordinated set of monetary and fiscal measures which neither the government nor the Reserve Bank has been capable of articulating.


We are now being pushed by the governor into the worst of both worlds. Interest rates will still not be high enough for “real” interest rates to be positive, that is for interest to exceed inflation. Economic actors will still expect (correctly) that inflation will continue to accelerate. In such circumstances, as has been the case since the start of the suppressed interest rate policies, there continues to be no incentive to save and every incentive to spend and to buy assets which might retain their value – foreign currency, shares, property. This is precisely the incentive structure in which inflation not only continues, but accelerates every month.


However, with the much higher nominal interest rates many of the entities which until recently have been exhorted to borrow will now find themselves in real difficulty. Individuals, companies and banks will go bankrupt and more jobs will be lost. A much greater threat is that bank failures could precipitate a systematic collapse of the financial system. As the government has proved itself so incompetent in the simplest of macro-economic management tasks, the likely prospect of it bungling a system-wide banking crisis is truly terrifying.


Investment and growth


The governor seems to think that by talking for an hour and a half and covering all sorts of topics within and outside his domain, that he would instil the confidence needed for investment to resume. This overlooks the fundamental weaknesses in the national governance structure. Investors, whether domestic or foreign, first and foremost require assurances about the rule of law and an independent judiciary. These are far more important than whether some export incentive scheme (that is irrelevant even on the governors own figures) is made slightly more attractive. And to talk of reopening discussions with multilateral and bilateral donors without resolving governance issues is fanciful.


The fact that the governor one month after the budget made two or three changes to fiscal provisions, including one involving 1% of budget revenues, suggests that the Ministry of Finance is no longer in charge of fiscal policy. This too undermines confidence. The self-appointed economic tsar in the RBZ tower seeks to manage everything from phone-call termination charges to whether bank staff have their traditional Wednesday afternoon of sporting activity.


In assessing the Monetary Policy Statement, Zimbabweans need to bear in mind that the Budget Statement presented in November failed to address any of the key macro-economic issues. These were all pushed over for the Monetary Policy Statement to deal with. That the statement for all its verbiage and multi-faceted coverage is so inadequate is a reflection of the stark reality that this government has abdicated its responsibility to govern.


The destructive economic policies which have been in place for the past four years gave opportunities for the politicians and well connected businessmen to grossly enrich themselves. But even for this coterie the continuation of the headlong destruction of the economic base no longer makes sense. For the public of Zimbabwe, it is a complete disaster.


-Tendai Biti is MDC shadow minister of Home Affairs.

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