RBZ reforms need backing

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ZIMBABWE’S central bank chief John Mangudya this week announced bold reforms in line with the new administration’s mantra of “open for business” when he presented his monetary policy statement on Wednesday.

Zimind Comment

However, analysts are asking whether his policy interventions can make a difference, considering the fact that he really has no power to compel the government to curb its runaway expenditure. But to his credit, Mangudya seems to be enjoying the support of the new regime in the execution of his duties. This should lessen the likelihood of unnecessary friction between fiscal and monetary policy. Policy stability and predictability are vital in the greater scheme of things. Among the highlights, Mangudya freed up the foreign exchange regime a bit and allowed both individuals and corporates additional access to part of their forex proceeds as this will go a long way in restoring confidence in the economy.

The central bank chief also left interest rates unchanged, an indication he wants to stimulate production after lowering rates in the prior year and announced plans to mop up excess liquidity in the market through the issuance of government paper through open market operations to support the value of the Real-Time Gross Settlement money currently trading at a discount as high as 60% against the American unit on the parallel market. This, if done honestly and earnestly, has the effect of reducing the premium of the RTGS/US$ considerably as liquidity excess liquidity is reduced. But it has become imperative for Mangudya to take decisive action in reigning in money supply growth after broad money supply grew 47,97% from US$5,4 billion in November 2016 to US$8 billion in November 2017. But can this government be trusted to cut down on expenditure?

Although Mangudya unveiled various measures to stimulate production and left interest rates unchanged, his policy seemed to gravitate towards merely complementing President Emmerson Mnangagwa’s efforts to woo investors, an exercise that could help solve Zimbabwe’s foreign exchange shortage. The central bank governor said there was also need to refine the operation of the Portfolio Investment Fund by ensuring that all portfolio investment inflows are ring-fenced to meet the outflows that will be processed by giving priority to capital before capital appreciation and dividends.

The central bank will introduce a 7% tax-free savings bond on non-resident transferable funds and provide US$1 billion guarantees.

“In order to provide return on remittable funds currently held in Non-Resident Transferable Accounts in respect of in-country funds such as dividends and profits due to non-residents that cannot be immediately remitted as a result of the current foreign currency shortages, such funds can now be invested in tax-free savings bonds at a coupon rate of 7%. This compensation process is necessary to assure investors of returns on their idle funds seated at banks,” he said.

In a bid to improve exports, the central bank introduced an Export Incentive Scheme for Horticulture, Cotton, Macadamia and Gold. Export receipts grew 36% in 2017 from the 2016.

The elephant in the room is fiscal indiscipline. The government must now take decisive action to solve that challenge.

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