Pre-monitory policy statement expectations

Victor Bhoroma

Expectations are high as the market awaits the presentation of the first monitary policy statement (MPS) of 2019 by the Reserve Bank of Zimbabwe in the next few days.

The bank knows the weight of hyperinflation and price discrepancies in the economy solely rest on its shoulders. The last MPS presented in October 2018 stirred the hornet’s nest in the economy and led to massive price hikes across all sectors. Key questions remain on a number of aspects such as the best currency option to take to save the Zimbabwean economy? How will that currency sustain its exchange value on the local market? What will happen to the $10 billion-plus Real Time Gross Settlement balances circulating in the economy? How will the $9 billion-plus Treasury Bill (TB) holders be paid termly? Will the central bank maintain the 1:1 mantra despite its lack of substance? And will the government not default on its domestic debt obligations.

With inflation rate closing the year 2018 at 50,2%, most producers are feeling the heat on cost of production especially local raw materials cost, transportation charges and labou-related demands for salary increments. The market has generally accepted the bond note to USD rate of +/-3.5 to 1 and it is now an open secret that the realistic price is the one indexed in USD (save for a few products which the government is subsidising through centralised foreign currency allocations). The market is gradually self-dollarising in a replay of the 2008 scenario and failure to take decisive action by the central bank can have catastrophic impact on the health of the economy in the short to medium term.

The central bank has already announced that the RTGS facility will now allow for USD FCA transfers locally starting 1 February. The move will help producers pay for supplies and other expenses indexed in US dollar locally. Key expectations from the upcoming monitory policy statement include:

Increase in foreign currency retention thresholds

Foreign currency retention thresholds are topical in the market as foreign currency woes continue and key exporters struggle to stay afloat in the harsh economy. The tobacco auction season is expected to start before the end of March 2019 and farmers have already hinted that they will fight for thresholds upwards of 80%, while the central bank has stated that they will be allowed to retain only 20%. With tobacco exports eclipsing 184,1 million kilogrammes and grossing $892 million worth of export earnings in 2018, the farmers’ demands carry a lot of weight. Strategic crop producers such as cotton, sugar, tea and coffee will also be queuing by the bank’s door with almost the same demands. The mining sector, which accounts for over 70% of the country’s export earnings, is clamoring to retain all its export earnings so as to stay afloat. The upcoming monitary policy should therefore play a balancing act to ensure these key producers do not divert produce to the black market in protest while adequately feeding the country’s nostro accounts for strategic imports such as electricity, diesel, petrol and cereals. Foreign debt obligations will also be expecting a piece of the small foreign currency cake.

Floating the exchange rate

The local industry has proposed the floating of the bond note RTGS exchange rate or allowing trading of currencies using market forces so as to save the economy.
Capacity utilization in the industry is expected to drop from 48,2% to 30% in Q1 if the current foreign currency shortages persist. The central bank has maintained the bond note to USD rate of 1:1 thereby diverting foreign earnings from key producers to consumptive imports such as fuel, grain, alcohol and other fast-moving consumer goods. By fixing the bond note to USD exchange rate at 1:1, the central bank has also been creating additional RTGS balances in the local market through paying exporters for the balances swept out of their nostro accounts. Floating the bond note RTGS exchange rate will allow for the trading of US dollars freely (or through the interbank) and thus improve forex supplies to the industry. The immediate negative impact will be a spike in inflation as producers will predictably push the exchange rate costs to the consumers.

Zim dollar re-introduction

The MPS may also be used to map key steps for the re-introduction of the Zimbabwean dollar before the end of 2019 as announced by Treasury. It is widely expected that the central bank will take advice from prominent economists to announce a monitary policy committee which will spearhead the re-introduction of the Zimbabwean dollar and demonetisation of the bond notes afterwards.

However, it is imperative that the selected committee becomes independent, instills confidence in the market and is given authority to carry out its duties.

The central bank should operate with the full knowledge that there is no trust in the Zimbabwean dollar because of the tainted past and efforts should be made to build that trust as a way of restoring market confidence. The new dollar will definitely need billions of foreign currency as back-up so as to sustain its value against other currencies. Above all, the fiscal consolidation exercise under the TSP programme should implement reforms to cut government expenditure as a way of managing budget deficit and stop the domestic borrowing binge. Without these key aspects in the Zim dollar roadmap, it will be a luta continua with the new dollar. The new currency will take the relay stick from where the bond note drops it and continue on the obvious free fall.

Victor Bhoroma is a business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on or alternatively follow him on Twitter @VictorBhoroma1.