By Phoebe Goremusandu,
RESERVE Bank of Zimbabwe (RBZ) governor Gideon Gono’s monetary policy statement issued this week rebased the Zimbabwe dollar, reviewed the
exchange rate and interest rates and introduced more pronouncements for the real sectors of the economy.
Our view is that the monetary policy measures introduced will need a long time before real improvements are evident in the economy.
In addition to bringing convenience to the transacting public, the experience of other countries has been that rebasing the currency can have the effect of fuelling more inflation, especially in the absence of other initiatives to tame inflation.
A rebased currency can create an illusion of lower prices hence a tendency to increase prices even higher. This could see inflation increasing to levels beyond current expectations.
Therefore it is important that there be initiatives to address inflation at the fundamental level. While there is a risk that some monetary values may be lost especially for bearer cheques that had been exported to other countries, the amount that will be forfeited in our view will not significantly affect the amount of notes and coins in circulation.
The planned introduction of a new currency under phase two is welcome but the macroeconomic fundamentals in our view have to be corrected if the introduction is to be a permanent solution.
The currency conversion is expected to generate uncertainty in that the transacting public has been given little time to adjust to the new system. It is also not certain at what point a new currency will be introduced as the market may also be caught unaware.
The strategy of the governor seems to be to to ensure that notes and coins in circulation are kept within the formal banking sector and we acknowledge that this is the correct way to steer the economy.
On the exchange rate front, on this basis, we believe that the governor moved the exchange rate in the correct direction, although this is clearly not far enough. Importantly, however, we are looking with keen interest at the announcement of the formation of the currency board.
The experience in other economies is that an independent currency board can be an effective and key entity in determining a “clean fair value” for the currency.
It is however not sufficient for the central bank to adjust the currency at six-month intervals as it makes it difficult to plan ahead, therefore the sector needs a clear and transparent exchange rate adjustment system.
The scrapping of the gold support price is also positive, as gold miners will get the international gold price translated at the ruling exchange rate. Apart from boosting earnings in the gold sector, this also reduces the central bank’s support to the productive sectors through quasi-fiscal activities.
The extension of the foreign currency retention period for exporters is positive as it makes it possible for exporters who may need to utilise their foreign currency beyond the 30 days that had been set previously.
This mechanism enables exporters to maintain the real value of their exports and has the potential to stimulate output in the export sector. While the tobacco sector is still accessing support from the central bank, the move should be towards a situation whereby the market price adequately compensates the farmer so that we move away support frameworks, which result in money creation.
The reduction in accommodation rates is expected to see lending rates softening and this should benefit the productive sectors of the economy. While this is favourable for borrowers deposit rates are expected to ease and in real terms returns on the money market are likely to become negative in real terms.
On the productive side it is also important to complement the reduction in interest rates with increased foreign currency inflows in order to boost production. Monetary policy was loosened significantly with the reduction in statutory reserves and while the banking sector has been encouraged to direct loans to the productive sectors, in our view, with lending rates expected to ease, domestic credit to the private sector is expected to expand significantly with most of the loans directed towards non-productive borrowing. All this will result in money supply accelerating and this ultimately feeds into inflation.
Overall, the illusion of lower prices created by the currency rebasing together with the soft lending rates expected to result from the lower accommodation rates will add to inflationary pressures. At the same time, money market investors and depositors to banking institutions are likely to experience reduced investment returns.
In the absence of enough stimulation of the supply side of the economy, we are of the view that sustained improvements in output and the economy are still a long way away. The foreign currency management framework remains unclear thus making it difficult for long-term planning. Money market investors will be the hardest hit as returns are expected to be significantly negative.
* Phoebe Goremusandu, is a senior markets analyst with Old Mutual Asset Managers, Zimbabwe.