Just what the doctor ordered?

At the market with Tetrad By Brian K Mugabe

THE Reserve Bank of Zimbabwe governor’s first monetary policy quarterly review was announced to an eagerly expectant business community and the wider popu

lace as a whole on Wednesday last week.


Issues that would have been of most critical concern for commerce and industry would have revolved around the exchange rate, interest rates, and the productive sector facilities.

Beginning with the exchange rate, which was probably the most topical issue prior to the statement as various exporting companies bemoaned the impact of a lower blend rate on their viability, concessions were made by the RBZ to ease the exporters’ plight. The “carrot and stick” measures introduced in the December statement were enhanced, for example, with all exporters who receive advance prepayments and acquit their CD1s similarly being allowed to retain 80% of the forex in their FCAs while selling the remainder at the auction rate, compared with the previous scenario where the 20% balance was sold at the government rate of $824: US$1. Other positive reviews made included those relating to incremental exports, the 15% FOB export incentive to exporters and the extension of the Memorandum of Deposit Scheme to other exportable commodities besides tobacco.

The biggest change probably related to the introduction of a floor price for exporters of $5 200:US$1, a rate which was extended by way of a “diaspora” floor price to all remittances from relatives outside the country. This gives a blend rate for exporters of $4 100:US$1, a rate which may prove viable for some exporters but simply reduces losses for others, due to the different import content cost structures of their various products. The figure remains a blended rate because despite representations made by industry, the surrender of 25% of export proceeds at government rate remains in force for most exporters as their CD1 acquittals are more likely to fall into the 1-30 day time period. Diaspora proceeds, in a boost to increase forex inflows through the official channels, will receive the full amount at the rate of $5 200.

This de-facto devaluation of the currency should certainly lead to more official inflows into the country’s coffers, provided of course that the rate is reviewed regularly enough to keep it attractive to those sending money home. But this in itself will not prove the panacea to the country’s forex shortages, despite the potentially large inflow figures that have been doing the rounds. The bottom line is Zimbabwe is a net importer and thus requires balance of payments support to meet its import requirements. Also, while a lot has been said about how we are exporting more and thus the shortage of forex is “artificial”, it should also be understood that we are also importing far more than we used to.

The resuscitation of the likes of Zisco and Wankie, stability in the agricultural sector, as well as resumption of ties with the international finance community should be pursued vigorously then, if a long term solution to the forex shortage is to be found. As regards interest rate policy, Gono advised that the dual interest rate regime will continue in the short term in its attempt to give support to economic growth, while arresting inflationary pressures. This would be “subject to the underlying supply response by the productive sector to concessionary finance”.

Given this agenda, the productive sector facilities, of which $1,42 trillion had been released during the first quarter, were rolled over to June 2005 for exporters and December 2004 for non-exporters, both at a roll-over rate of 50% p.a. To curb the inflationary impact of these funds, the facility would be converted into a revolving fund that would remain capped at $1,5 trillion. To qualify for the extension, various export, employment and price reduction targets would need to be met. The roll-over of the cheap money has proved welcome to industry, with the hope that it will to some degree offset the cost of retention of the government rate that still applies to 25% of export proceeds. However, the expectation of a material supply response seems optimistic, given the massive decline in demand experienced in December and through to the first quarter of the year, as consumers’ disposable incomes have continued to decline in the face of our hyperinflationary environment. With the stock build up that had prevailed resulting in industry performing well below expectation only unwinding now, it is unlikely that a huge supply response will materialize until such a time as demand indicators become positive again, lest companies are once more stuck with stocks they can’t sell. Yet how does one boost demand without espousing expansionary monetary and fiscal policies which in turn fuel inflation?

Perhaps to in some way take cognisance of this challenge and encourage demand, market-related interest rates which were described as punitive by Gono have since tumbled as the Gono undertook to accommodate banks at nominal interest rates which when annualized on a compounded basis, yield a positive real accommodation rate of 10-20 percentage points above the prevailing inflation rate. By the RBZ’s own example, a nominal overnight rate of 205% would yield an effective daily compounded annual rate of 673%, yielding a positive real accommodation rate of around 10%.

A bold attempt then by Gono to tackle the critical issues. But clearly a long time and much tweaking still remains before the economy achieves a semblance of normality. For, unfortunately, with so much damage having been done to the economy over a fairly lengthy period of time there can be no miracle cure.

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