Monetary Policy Committee in false start

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The Brett Chulu

THE long-awaited Monetary Policy Committee (MPC) met on October 28 and 29 for the first time since its statutory birth in 2010.The MPC was created in 2010 by the insertion of Section 29B through Act 1 of 2010 into the Reserve Bank Act (Chapter 22:15). At the end of the two-day deliberations, the MPC released a statement detailing its musings and policy intents.

The long delay is due to the fact that a local currency was needed to enable an MPC to execute its mandate.With the argument for government intervention in the economy won by leading lights such as the mathematician-turned-economist John Maynard Keynes, governments have come to define broad objectives for the economy: full employment (5% unemployment level), price stability (inflation and foreign exchange), acceptable economic growth rate to maintain an acceptable standard of living, balance of payments stability and an equitable distribution of income and wealth.

Commonly, monetary policy is leased to influence four of these broad economic policy objectives, namely: price stability, level of employment, level of desired economic growth and the balance of payments equilibrium. Monetary policy uses three tools to make its contribution towards the attainment of these four high level objectives: interest rates, supply of money and anchoring market expectations. The Reserve Bank of Zimbabwe (RBZ) Act sets out price stability and interest rate as two explicit key macro-economic deliverable for the MPC.

In terms of money supply, the RBZ is not explicit — it mentions a specific approach to controlling money supply, namely open market operations.

The RBZ Act says the MPC shall determine the monetary policy of the country without specifying the boundaries — it is a recipe for conflict and policy turf wars.

A reading of the MPC statement shows that it deeply understands best practices in the operation and scope of an MPC mandate as it goes beyond the broad outlines of its implied Terms of Reference as briefly outlined in section 29B of the Reserve Bank Act. The Act makes it clear that the MPC is independent from the RBZ board, submitting its “findings” to the RBZ board for information purposes only.

The MPC statement focussed on six areas, namely: general economic outlook, inflation, money supply, cash challenges, exchange rate and the interbank market.
However, the MPC’s diagnosis and opinions about the state of the economy and the suggested monetary policy interventions are largely questionable.

First, the MPC believes that the basic economic fundamentals are sound. The MPC asserted that: “the key basic economic fundamentals remain sound, and in place to meet its(country’s) stabilisation and developmental objectives.”(parentheses are mine). The MPC went further to affirm that the decline of the Gross Domestic Product for this year will be around 6,5%. They attribute the decline in the GDP two what its calls “twin shocks”, namely Cyclone Idai and the drought. For starters, the MPC does not explicitly state what these sound economic fundamentals are.

If the economic fundamentals are sound; how does the MPC explain the following economic realities: formal employment is below 10%, slightly more than half of the population (8,5 million) is food insecure according to multi-lateral institution reports, over 70% of the population is living in poverty according to ZimStat and that 5,7 million people in Zimbabwe are living in extreme poverty according to a World Bank released two weeks ago? There is more.

The IMF, following its first assessment of our current IMF Staff Monitoring Programme (SMP) performance on September 26, projected that our economic decline will be in the double-digit zone, meaning the MPC’s diagnosis is about 50% more optimistic.

Production is the foundation of any economy — any good introductory economics textbook will make it clear from the outset that the key purpose of economic activity has to do with production. Here is what one introductory economics textbook says:

“The key purpose of economic activity is the production of goods and services, and the output of a modern economy is an endless flow of such utilities.” What soundness in economic fundamentals can there be if our production is so low that we have an unemployment rate of over 90%? This country is producing key agricultural crops at levels of the 1960s and the 1990s when our population has since doubled and trebled when compared to those years?

Zambia, shockingly, is ranked number two in the world for wheat productivity. Zambia produces seven tonnes per hectare (ha) of wheat, just two tonnes per ha shy of the world wheat productivity leader, New Zealand. Zimbabwe is ranked 40 at three tonnes per ha. It is the farmers we hounded out of Zimbabwe who have taken Zambia to these heights of glory, a badge that could have been ours.

For maize, it is shocking that Zimbabwe is not even listed in the maize productivity ranking simply because our national maize yield per ha is less than the threshold of one tonne per ha. If we produced maize at Zambia’s, Namibia’s and Nigeria’s two tonnes per ha, this country would be producing at least four million tonnes of maize every year, two million tonnes in excess of our yearly national requirement. Any economic analyst who understands the foundation of the Zimbabwean economy knows that agriculture is the base of our economy, the key driver of our aggregate demand, the very measure of GDP.

If this country has not addressed the fundamental constraints to lifting production and productivity levels in agriculture, namely, secure tenure in farmland, it befuddles the mind as to what sound economic fundamentals the MPC is seeing. Picking the shrinking of current account deficit as a sign of sound economic fundamentals is incorrect analysis.

The MPC is failing to take into account the possibility of trade flows that are not going through formal channels in our largely informalised economy. Incidents of under-invoicing exports and overstating imports have not been assessed as a strategy to externalise forex, thereby starving the market of forex, limiting capacity for imports but not the appetite for imports.

The line the MPC is taking on sound economic fundamentals and an under-stated economic decline projection sounds like the economic homily sponsored by one of its prominent members in their personal private capacity, mirroring the view of the Treasury. This casts a pall on the intellectual independence of the MPC, giving rise to doubts that the MPC can exercise independence in its critical monetary policy decisions. A study of the work of MPCs shows the respect an MPC commands builds its confidence with the market.

Without broad market respect, decisions by the MPC such as anchoring inflation expectations will be largely ignored.

To be continued next week.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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