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RBZ Governor off on encouraging note

A FEW weeks ago I welcomed the announcement of the appointment of Dr John Mangudya as the incoming Governor of Reserve Bank of Zimbabwe (RBZ), foreshadowing that his extensive banking, economics and administrative experience, and his ethic, would be an great foundation to progressive recovery of Zimbabwe’s distressed economy (subject to government’s willingness to heed his advice).

Eric Bloch

On May 1 Mangudya came into office, and within a week released his first statement on the economy and the remedies required for the economy to be revitilised. The statement reaffirms he recognises the economic realities, and of the restorative measures and actions so very greatly needed.

At the outset, he said “whilst the Reserve Bank has no tools at the moment to influence economy directly, I believe that its greatest strength vests on relationship management, policy advice and ability to put in place national beneficial financial structures to increase liquidity and resuscitate the economy”.

It is a harsh statement of fact that currently the powers and authority of the RBZ are so limited that it is severely constrained in influencing economic development, but nevertheless Mangudya recognises the few resources available to it to influence economic revival.

The statement contained a pledge by the Governor to focus on “the great responsibilities that the economy is expecting from the Reserve Bank of Zimbabwe at the time the economy is going through significant economic challenges.” Moreover, he highlighted the challenges, stating that “they include low aggregate domestic demand, deterioration of the balance of payments, banking sector vulnerabilities, and low industry capacity utilisation”.

Amplifying thereon, he stated that “the lack of liquidity and its limited circulation within the economy remains the biggest immediate challenge the Zimbabwe economy is facing.

At the epicentre of this liquidity crunch is the country’s banking sector, which has been operating without a formal interbank market and a lender of last resort since the introduction of the multiple currency system in 2009, and Mangudya emphasised the RBZ will “need to attend to these challenges and come up with solutions for the betterment of the economy”.

He added that the RBZ would need to arrange for funding to capitalise itself and also become a lender of last resort, stressing that “we need to have a transparent and responsible Central Bank.”

The governor further stated “the Reserve Bank is also expected to promote a strong and stable financial system and to ensure that the multiple currency system is buttressed and maintained to restore and enhance confidence and credibility. The multiple currency system is sine qua non for turning around the fortunes of the economy.”

Hopefully this very authoritative and well-considered statement will put to rest the grossly rumours of an imminent return of the Zimbabwe dollar. The endless rumours have recurrently contributed to the underperformance of the economy, and to banking sector illiquidity. Therefore, the governor’s statement is of invaluable importance.

Mangudya recognised that “the greatest panacea for our challenges is discipline.

Discipline to utilise our resources efficiently, discipline to know that we need to increase production before we increase consumption, discipline to refrain from living beyond our means as this would bring greed and corruption, discipline enough to find an equilibrium position on a point of harmony between the need to promote indigenisation and the need for foreign direct investment and the ability to synchronise the two.”

He then amplified further on discipline, saying we need “discipline to know that we need to work very hard for this economy”.
Expanding upon his earlier reference to the negative economic circumstances of the last three years, the governor said “the past three years have been challenging for the Zimbabwean economy and difficult for many Zimbabweans. People cannot find jobs, companies cannot pay each other as well as service their loans with banks, tax revenues are going down and the tax base is narrowing. The economy is weaker and its system is depressed.” He noted that key to addressing these circumstances is that “we need to be courageous and skillful to manage the situation on hand”.
Moreover, he identified that “it is also critical that the relevant authorities and the productive sectors of the economy promote value addition and increase export earning to enhance the level of liquidity in the economy.” Insofar as to the “relevant authorities” involvement is concerned, he unreservedly recognised that, despite constraints, the Reserve Bank has a role to play. “Whilst the Reserve Bank has no tools at the moment to influence the economy directly, I believe that its greatest strength rests on relationship management, policy advice and the ability to put in place national beneficial financial structures to increase liquidity and resuscitate the economy so as to unlock value in the economy and to work towards meeting some of the critical objectives enunciated in Zimasset.”
Mangudya is especially correct when he refers to RBZ’s total lack of “tools” to influence the economy directly, and if he is to succeed in the enormously onerous tasks that lie before him, government must provide such tools without further delay. First and foremost, despite the magnitude of government’s bankruptcy, it needs to capitalise RBZ to a meaningful extent, being not less than at least US$100 million. Concurrently, it must accord the bank’s board of directors, and the governor, real and substantive autonomy. Third, government must constructively heed RBZ’s economic advice, instead of ignoring that which does not tally with its own preconceptions.
Government must also vigorously reengage with the international community in general, and the West in particular. Over and above the general economic and other benefits which Zimbabwe would receive from substantive reconciliation, this would also greatly enhance its interaction with the International Monetary Fund IMF, World Bank, European Investment Bank, African Development Bank, African Export-Import Bank, international private sector banking and financial institutions.

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