Monetary policy merry-go-round

ON June 8, we woke up to a Monetary Policy Committee (MPC) statement released by the central bank. Curiously, it took two weeks to have the deliberations of the MPC made public. The statement creates monetary policy confusion, in my opinion.

The Brett Chulu Column

Exchange rate confusion

The statement announced the abolition of the fixed ZW$:US$ exchange rate of 25:1 in favour of a “free float”. This comes at a time the central bank’s X-factor theory is being shattered. Forex rates continued to soar even after strict controls of mobile money and Zipit transaction limits were recently imposed. Rates tested the 85:1 level this week, creating a 240% gap between the rampant forex grey market and the interbank market.

This strongly suggests that confidence is a big factor in the pricing of the local currency. The confidence factor is far more than has been previously thought. A year ago, this writer made a forecast that the rate would breach the 30:1 level and after that it would soar relentlessly in what this writer labelled the Armageddon scenario.

Confidence is the elusive X-factor the authorities have been searching high and low. So we have now cycled back, monetary policy-wise, to the “free-float” exchange mechanism to try and plug the arbitrages monetary policy spawned in the first place.

Let us not be deluded into thinking we are now firmly on the path of liberalisation of the official exchange market. We are far from it; a new strategy is in place: forex restrictions are tightening for some sectors while being relaxed for others that have outsized leverage over the central bank.

Forex liquidation confusion

In a joint press statement released on March 13, the Reserve Bank of Zimbabwe (RBZ) and the Tobacco Industry and Marketing Board (TIMB) stated that the 50% portion of forex proceeds earned by tobacco growers would be treated as free funds and would not be subject to liquidation (compulsory) requirements.
For the avoidance of doubt, the statement is quoted: “To facilitate adequate preparations and importation of inputs for the next growing season, the foreign entitlements of (tobacco) growers shall be treated as free funds and may be retained in their FCAs (foreign currency accounts) for an indefinite period.” (the parentheses are mine).

On May 22, the MPC sat and resolved to reintroduce on July 1 the 30-day limit for liquidating what they call “surplus foreign exchange receipts”.
The question that arises from the MPC statement is: has the exemption of liquidation of forex held in tobacco growers’ FCAs been reversed? If systemic thinking had been applied in the crafting of the MPC statement, it should have stated upfront that the 30-day forex liquidation requirement is not applicable to the tobacco growers. That statement, by default, introduces policy instability, defeating the confidence-building that ought to undergird the stabilisation of inflation and forex rates.

Investors will point to this as another example of habitual policy reversals, inuring their skepticism over economic reform promises. Even if the central bank may later “clarify” through technical language nuances and eruditions such as the difference between tobacco growers and tobacco exporters, it will be forever an afterthought, reflecting knee-jerk policy reactions calculated to try and rein in short-term monetary spikes such as the runaway exchange rate and raging inflation. This barely instils confidence in economic agents.

Gold producers were recently given concessions with the small-scale gold producers extracting the most favourable terms. It is understood that small-scale gold producers who account for 60% of gold deliveries are receiving 100% payment in hard cash forex, but at a fixed price a gramme for a particular grade, with fine gold (99,9% purity) going for US$45 per gramme.

One hopes this is an extremely short-term measure. If other forex earners will be subject to the 30-day liquidation limit, how will it apply to those being paid fully in hard forex cash? It would create an impression that those with better leverage extract concessions that exempt them from general monetary policy. It adds to monetary policy confusion.

We are in a cycle of monetary policy confusion. Restrictions on forex have clear historical footprints: economic agents have been known to react by engaging in invisible entrepreneuring behaviours such as side-marketing, under-stating invoices for exports and over-stating imports.

The 30-day liquidation requirement will likely improve forex availability to the authorities in the short-term but will most likely create forex shortages as exporters engage in invisible entrepreneuring. When it comes to monetary policy challenges, it seems we do not want to learn from the past. The cycles of confusion are not limited to the liquidation cycles of confusion.

Reserve ratio confusion

The MPC resolved to reduce the reserve ratio for banks to 2,5% from 4,5% in order to stimulate lending to productive sectors. The reduction in the reserve ratio is calculated as per textbook economics theory to increase credit-creation by banks and swell money supply.

In theory, this should not result in significant inflation as the theoretical expectation of an increase in real production is seen as tempering inflationary pressures. The reserve ratio policy relaxation shows either a lack of systemic analysis or a poorly done one. The same MPC statement talks of introducing Open Market Operations (OMO) to control liquidity.

Research shows that fragile economies suffering from sustained and elevated inflation levels through reserve money targeting almost always suffer sharp interest rates hikes as the OMO instruments try to discover their fair market prices. There is a big possibility that the expected high interest rates will choke firms, thereby defeating the whole point of reducing the reserve ratio.

The increased lending as a result of credit-creation occasioned by a reduced reserve ratio for banks may, instead, be channelled towards speculative purposes, pushing up inflation and causing forex rates volatility, given our record of controlled forex allocation and rock bottom confidence in our local currency.
In any case, our banks are sitting with excess reserves of the local currency in excess of ZW$7,5 billion. The question is: Why is that excess money not finding its way to productive sector? And to what end does opening a hosepipe into an ocean of money that is idle improve the flow of money to the productive sectors?

It is a mish-mash. Some are allowed free use of the US dollar, others are not. Some are subject to forex retentions, others are not. Some could be exempted from the 30-day forex liquidation limit, while others carry the burden.

We have a serious confidence deficit. The only way to get around the confidence crisis is to dollarise. Official dollarisation is mainly resisted because it takes away the jobs, power and prestige of certain entities. Anything short of official dollarisation will leave us dizzy from the economic policy merry-go-round except that there is nothing merry about it.

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.