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Which direction will Mangudya take?

Reserve Bank of Zimbabwe governor John Mangudya will in the next few days present his Monetary Policy Statement.

Zimbabwe Independent Editor

With his policy statement, the market is keen to see the direction the central bank chief takes and the resultant monetary measures it will introduce, especially now when he has found new leverage in the form of money supply after the introduction of bond notes.

With a ready and oiled printing press, it remains to be seen what course the central bank will take.

His predecessor, Gideon Gono, earned himself notoriety for running the printing press to finance quasi- fiscal operations and to keep President Robert Mugabe in power, triggering unprecedented hyperinflation.

Against such a background, whatever limited monetary interventions Mangudya can introduce, they will not be enough to get the economy going again.

Traditionally, central banks increase the total supply of money in the economy more rapidly than usual in times of economic decline.The effect of monetary expansion is increasing the overall demand for all goods and services in an economy, which boosts growth as measured by gross domestic product. If Mangudya attempts to stimulate economic growth in the economy by running the printing press, the move could trigger inflation.

In fact, the move could backfire spectacularly. His hands are tied, with regards the the amount of bond notes he can issue. Although this works well elsewhere, Zimbabwe is an isolated instance.

The only thing close to a currency Zimbabwe has is a bond note, which the central bank claims is backed by a US$200 million Afreximbank facility. In other words, any note outside the US$200 million facility is not backed by any value and could create valuation problems, triggering total loss of confidence in the currency. Concerns are rising over the bond note’s value, with importers not accepting the promissory currency as legal tender for transactions.

Apart from that, the troubled southern African nation uses a basket of the world’s currencies ranging from the US dollar to the yuan.

In light of this, Mangudya is not expected to come up with anything exciting or earth shattering.

In a country where the wage bill gobbles up more than 90% of revenue, company closures are rampant, government policy is inconsistent and cash in short supply, there is not much room for decisive monetary intervention.

Against such a background, Mangudya needs to delicately balance between the need to stimulate economic growth and maintaining the status quo ahead of elections.

With noisy elections looming, Mangudya might be forced to defy economic logic and pursue populist agendas to the detriment of the economy.

Last year, Finance minister Patrick Chinamasa’s proposal to suspend civil servants’ bonuses for two years and to implement productive measures was rejected.

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