2018 monetary policy — An objective assessment

The 7th of February 2018 saw Reserve Bank of Zimbabwe governor John Mangudya unveiling the 2018 Monetary Policy. The policy came on the back of nationwide euphoria as Zimbabwe finds itself in a new dispensation. The monetary policy follows a largely austerity-driven fiscal policy pronounced by Finance minister Patrick Chinamasa on December 7 2017. This discussion will seek to analyse the major highlights in the policy document and their consequences for the economy going forward.

Bond notes and exports

Admittedly, the most surprising observation from the monetary policy is that against all odds, bond notes (when viewed as an export incentive) managed to improve the performance of exports over the financial year under review.

From 2016 to 2017, exports increased by a significant 36.8% from US$2,54 billion to US$3,48 billion, adding an additional US$1 billion of export earnings. Over the same period imports only increased by a marginal 4,5% to close at US$4,9 billion, up from US$4,7 billion. The resultant effect was the narrowing of the overall balance of payments from US$2,18 billion to US$1,46 billion. If the above growth trend is maintained, there will be an improvement in the country’s foreign currency earnings and this will improve the cash notes and nostro availability.

There is need for government through the central bank to continue targeted interventions and facilities in gold and tobacco as the two are some of the biggest export earners. A step in the right direction from the same monetary policy is the pronouncement around gold and tobacco facilities that were increased from US$23 million to US$70 million and US$74 million to US$150 million respectively.

Govt borrowing too high

Despite the positives highlighted above, there is however a very worrying piece of statistics on money supply developments in the economy.

Broad money supply recorded a 47,97% growth from US$5,42 billion in 2016 to close at US$8,02 billion at the close of 2017.

This development is largely attributed to growth in the government’s portion of domestic debt which grew 70,45% to close at US$6,27 billion in 2017. This when read together with the increase in government bills and bonds holdings which grew 62,5% from US$3,2 billion to US$5,2 billion between 2016 and 2017, shows that the government is the biggest player in private financial markets and is essentially “eating” what everyone else is supposed to be benefiting from.

The crowding out effect of government’s borrowing from the financial markets is clearly revealed when we consider that banks have only been able to grow their credit to the private sector by a paltry 6,97% in 2017. This development works against the capacity of private sector firms to champion production, create employment and ultimately improve the income levels across all sectors of our society. Even more worrying is the fact that the bulk of government borrowings are in essence funding recurrent expenditure as opposed to improving the economy’s gross fixed capital formation through developmental projects.

Cash challenges

In the face of never-ending cash challenges it was perhaps a little more refreshing to note that the economy has fully embraced digital platforms. A total of 97% of the US$97,5 billion transactions carried out in the economy in 2017 were done using digital platforms. This attests to a massive behavioural transformation amongst our populace from the previously cash-dominated economy to a cashless society.

This state of affairs has also helped the economy to register some positives in the quest for financial inclusion. Overall growth in the number of bank accounts increased by 106%, the number of low-cost accounts increased by 152% from 1,2 million accounts in 2016 to 3,02 million accounts in 2017. The above will help in formalising the economy and also help in the quest to include everyone in the provision of financial services.

Strong financial sector

The banking sector’s performance was very strong, with all indicators pointing to a strong performance and healthy state of our financial system and this is crucial since banking is at the anchor of any economic recovery.

It is refreshing to note that the monetary policy outlines that all the licenced commercial banks are compliant in terms of the RBZ’s minimum capital requirements. Total banking sector capital increased 10,48% from US$1,24 billion to close at US$1,37 billion. A strong capital base in the market is necessary in order to attract deposits and counter shocks that may arise in the market. Overall profitability of the banking sector put up a strong showing to close at US$241,9 million from US$181,06 million. The profitability is complemented by a health market liquidity ratio of 62,62%. The ratio is 32,62% above the prescribed prudential liquidity ratio as required by the central bank. The banking sector, however, continues to suffer from the absence of a lender of last resort as the RBZ has limited capacity to perform this function.

However, the US$200 million Afritrades facility which has been extended to February 2019 will enhance the stability of the banking sector in the event banks require agent accommodation in times of liquidity stress.

Inflation: Recurrent ghost

In spite of the other positives identified above, the economy continues to face inflation headwinds driven by food inflation. Headline inflation numbers closed at 3.46% between the years 2016 to 2017. This was largely owing to food inflation which ended the year 2017 at 6.60% up from (0.30%) in December 2016.

Non-food inflation also continues to exert pressure with the level having risen to 2% from (0.82%) in 2016. This growth is being spurred by the continued existence of a parallel market for foreign currency which importers require to finance the purchase of most commodities we have on our shelves. The continued existence of inflation affects real incomes in the economy as purchasing power continues to be eroded. Inflation also creates an environment for the deepening on speculative tendencies that the market continues to face due to uncertainty.

The future ahead

Going into the future, much is going to depend on the harmony that we can expect to witness between fiscal policy and monetary policy.

Already government has done a lot in setting up a policy framework that is largely austerity driven. The need for the government to lessen the burden on foreign investors by doing away with bottlenecks is very crucial in improving our economy’s ease of doing business ranking. This will be crucial in attracting and retaining capital.

The need for financial discipline from the government cannot be over-emphasised. The RBZ and the government need to adhere to the set borrowing limit of 20% of the total budget per financial year to ensure the country’s stock of domestic debt does not keep spiralling.
In conclusion, the monetary policy was a decent intervention which provides hope for the future amidst an optimistic environment that has been cast on us by the coming in of the new dispensation.

Let the good times roll!

Mawarire is head of the economic research cluster of the Young People’s Dialogue (YPD), a think-tank of Young Professionals passionate about their country, Zimbabwe. — mawarirer@gmail.com or WhatsApp +263 772 242 941.