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Monetary policy in the horizon

It has become a low-profile event since we dollarised. Not long back the announcement of a monetary policy was like an epic juncture for one to either break for broke or tame the daily challenges associated with the eroding value of currency.

Christopher Mugaga

The then governor would receive as much criticism as the accolades for surprising the market at every opportune moment he was afforded the podium to outline the monetary objectives of the nation. Blue collar workers, civilians, members of the security as well as the bureaucrats would all be holed in one spot to digest the endless volumes of measures, some so fiscal in nature that announcement of the national budget had in some way become a “curtain-raiser” for the long awaited monetary policy statement (MPS).

How daring the winds of change are? The soft-spoken, yet blunt central bank governor John Mangudya rarely minces his words when exposing market misdemeanours. He seems to have become so accustomed to criticism that his days at the biggest bank in the land were not freed from utopian scrutiny notably by competitors’ in the trade. His unassuming character will come to test very soon as he announces the monetary policy.

It is a policy to be announced on the background of a lethargic 2015 with most economic prospects dented by the declining commodity prices as well as an El Nino phenomenon which will make the land a dying ground for domesticated livestock. Such a baseline scenario of a 2, 7 % average economic growth for 2016 is nonetheless predicated on a number of increasingly potent downside risks being lifted which include recovery of commodity prices, home-grown fiscal vulnerabilities in a few countries as well as external risks. Risk aversion from foreign investors may lead to a reversal of sentiment towards the region and capital outflows, hence putting pressures on countries like Zimbabwe with large external financing needs, and forcing abrupt macroeconomic adjustments.

With a number of local banks desperate to attract tangible investors as the existing capital requirements appear like a pipe dream for them, it could be worthwhile to see them reviewing their status to either low tier financial institutions or merge. However, it is pertinent to appreciate that merging two or more institutionally weak banks will not bring about a stronger bank. This by implication means that it will be less costly to take the route of market exit rather than buying time through courting “dreamland” strategic partners. It is my fervent belief that we have some local banks which are never meant to exist in this multi-currency regime as their model of business cannot definitely withstand the ever-bludgeoning informal economy whose unchallenged disposition to mobile banking is unmatched.

The recent listing of a micro bank, GetBucks came as a relief to a market which has not witnessed new listings for nearly a decade with trades dwindling by each day as the high and mid cap counters stretch into a saturation regime as witnessed by their flattening top line.

Some of the banks are indeed struggling to continue existing and it is time they choose either to shape up or to ship out. The near absence of a robust corporate governance framework makes them an almost complete eyesore to would be investors. The soon to be announced monetary policy has to correct possible opaque shareholding structures in the existing banking institutions. It is unfathomable to moot an efficient interbank market with a number of those struggling institutions still existing. In simpler terms attempting to reintroduce the interbank market without entirely cleaning up the whole financial system is impossible.

Banking sector net profit was US$86,09 million for the period ending September 30 2015. The troubled banks have the potential to drag downwards the aggregate profitability from the September levels whilst spiking up the non-performing loans (NPLs) ratio. By excluding such troubled banks the NPL will stand at about 13% as argued by the Pareto principle given that the ratio of toxic assets as it appears more than 80% of NPL contribution is coming from about five banks. Economics literature defines the Pareto principle, also known as the 80/20 rule or law of the vital few, as a theory maintaining that 80% of the output from a given situation or system is determined by 20% of the input. The principle can be interpreted to say a minority of inputs results in the majority of outputs.

The monetary policy has to find means and ways to consolidate the efficiency of the interbank market which became operational in March 2015. This goes hand in glove with the capitalisation of the bank with Finance minister Patrick Chinamasa promising to further recapitalise the central bank to the tune of US$150 million. This, therefore means the coming monetary policy must be a platform to interrogate and evaluate how the interbank market has fared since its reoperation while at the same time finding the best model of pricing financial instruments, notably the Treasury bills without leaving the paper unattractive as that tends to threaten the interbank market efficiency.

As a matter of fact, it is quite difficult to exit a dollarised economy and this is the hour the monetary authorities have to continue reminding the different economic participants in Zimbabwe of the newly added yuan in the basket of currencies.

However, the awful trade numbers between Zimbabwe and China will not make a compelling case for the active participation of the yuan in Zimbabwe’s financial markets. With a trustworthy figure at the helm of the apex bank in the country, it will not shock the market to see the Chinese currency being well received the way the bond coins charmed the entire market to the extent of being preferred to the depreciating rand.

There is also need to expedite the amendment of both the Banking Act and the RBZ Act and for accurate validation of true NPL ratio.

Mugaga is an economist. He is the CE of Zimbabwe National Chamber of Commerce. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com, cell +263 772 382 852

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