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Analysis of monetary policy statement


RECENTLY the Reserve Bank of Zimbabwe governor John Mangudya released the February 2021 Monetary Policy statement aptly titled ‘Fostering Price and Financial system stability’.

I had the opportunity to share, at a Zimbabwe Economic Society (ZES) hosted panel, my thoughts on the statement. In my opinion there are three key factors missing that were in misalignment with the report.

First, policymakers need to take into account the complete picture from the data presented and avoid solely relying on academic indicators. Academic indicators such as composite index inflation rates in isolation seem to be conveniently applied to skew the economic outlook and promote a policy agenda, which does not support a progressive agenda.

A second point to highlight is that of our banking sector’s conservative stance in the midst of a global pandemic — most progressive governments in the region are looking at accommodative policy to retain production activity at  least cost recovery and maintain consumer spending power. While the statement recognises the need to maximise asset utilisation, it is minimalistic in its view of the role of the domestic market and why it is important to strengthen the domestic market at this time. In doing so the prominence of activity to support all domestic commercial activity is massively underplayed throughout the report.

Mollie Orshansky in 1981 argued that poverty, like beauty, lies in the eye of the (data) be-holder; it is a matter of choice of what the one in possession of the data chooses for you to see. For instance the report focuses on the ‘stable foreign exchange rate’ from the official auction market. This appears to have remained stuck at 83 since the inception of the auction.

To take this at face value is to imply that at every auction there is the exact number of buyers requesting the exact amount of forex from exactly the same number of sellers over a period of six months. Such a condition cannot exist in an open auction market, further one that is impacted by the lockdown conditions of a global pandemic.

This type of fixing the exchange rate over a reasonably lengthy period of time must be investigated — something is definitely amiss if this is indeed a genuine auction system. In any case such a perfect market scenario would rely on perfectly efficient information asymmetries which simply cannot exist in Zimbabwe.   Given the presence of the persistent sticky exchange rate we must desist from calling this an ‘Auction Market’ and rather call it ‘a currency peg regime.’

It would not take much market analysis to show that there is  a persistently present parallel market rate. This predominantly exists for two main reasons; (1) being the  public mistrust of the banking system including the Central Bank and (2) the popular informal market sector that accounts for nearly 70% + of all commercial activity in Zimbabwe.

One may also suggest a third element, which is the delay in cash availability through the official auction, which RBZ reports to be an average of 14 days. (I shall not pay much attention to this 3rd element because the rent-seeking behaviours of those allowed to participate in the official auction probably help their patience. I mean would you wait two weeks to buy something for ZW$83  or do you  buy it straight away for ZW$120-130?).

Public mistrust and presence of an informal sector bring to the fore the parallel market which is quite buoyant and is not going away anytime soon unless the Central Bank respects the data and starts to have policies which are geared towards recognition of the informal sector as a key stakeholder. In addition, the Central Bank should pay more attention to working with Retail Banks towards restoring trust in the banking sector.

Productivity and the taxpayer remain the core victims of this persistent parallel market scenario. The opportunity cost of capital is that for every US$1 gained by the economy, the central bank is foregoing returns of nearly 44%.

On an aggregate level what this means is that those having access to the official auction rates are able to make gains worth US$255 million by not using the common exchange rate. The only good reason that policymakers would support this loss would be if the productive capacity of these businesses increased such that their overall contribution to the economy surpasses US$255million.

This currently is not something that is verified. The details used to decipher, who is allocated currency from the reserves is a closed conversation which the public can only accept as fact. There is no evidence to suggest that there is an alignment of productive capacity of those participating and the extent to which access to the foreign currency will result in increased firm income. It is in public interest to ensure that this auction has not become a cheap expropriation tool.

The MPS claims that the majority (70%) of foreign exchange at the auction is given to businesses which are purchasing raw materials, machinery, equipment, pharmaceuticals, chemicals, fuel, electricity and other strategic imports. It would be ideal if the bank would release data of the bids at the end of each auction on who has been awarded how much and for what purposes.

To date the publicly available data shows a chart from the MPS as at February 2021 which has a discrepancy of 45% which is not accounted for. A more detailed analysis published by the RBZ recently showing a list of organisations participating in the FX auction also records a miscellaneous line which accounts for 55% of the aggregate value of funds distributed at auction.

As things stand, the idea that the official auction is increasing productivity remains something of an enigma, particularly as the same report indicates a meagre 5,8% increase in merchandise exports, which are offset by 5,1% increase in imports. Despite the majority of exports being from platinum group metals, the recently published list of participants in the official auction does not clearly spell out alignment to the platinum group metals.   Further a notable claim in the MPS that there is a ‘decrease in import of raw materials, energy, machinery’ due to Covid-19 lockdown restrictions is somewhat contrary to the continued foreign currency reserves demand through the auction throughout the lockdown periods.

In addition, an increased food import bill increasing by 204% coupled with maize imports increasing from US$26,7million to US$297,8million, clearly shows that productivity is categorically not benefitting from the low official auction rate. A fair argument may suggest that the loss of today may be tomorrow’s benefit perhaps the gains are still to come through — however given the global market post Covid-19 position, such an optimistic outlook for a developing economy seems highly unlikely.

The monetary policy statement also suggests that the official auction reduced the exchange rate increases in the parallel market since its inception. While this may be plausible, particularly as some of the high-volume wholesale transactions moved to the auction, we must however not downplay the coincidence of the inception date of the official market with the start of the global pandemic.

The global pandemic introduced a new normal made up of border restrictions and lockdown regulations. Both these have meant that business slowed down significantly. Reduced business activity inherently reduces demand which reduces production. When this happens, demand for foreign currency is also impacted particularly for the informal sector, who are the key players in the parallel market.

Another benefit that the central bank attributes to the official auction is that of the stable inflation rate of 348% experienced in the second half of the year — with monthly figures showing a low but stable decline over the last six months.

Other regional economies reporting reduced inflation in 2020‘s latter half attribute this to low business activity. Low business activity has reset the economic equilibrium to a new normal.

This is a Covid-19 multiplier effect resetting the equilibrium for Zimbabwe to around the 300% region and is not an indication of bank policy. This would imply that individual income and productivity has not been impacted nor affected by this new level of inflation albeit ‘reduced’. I am sure a   street survey on personal ‘real’ incomes in the last six months would further qualify this.

Policymakers need to move more towards an “accommodative” policy stance which focuses on how the key economic players can be included within the financial services sector. Currently the policy statement is focussing on increasing or maintaining reserves.

However, with reduced exports, increased food imports are at best overly ambitious. An accommodative stance looks at how the unbanked 55% of the adult population can become part of the financial system and in doing so banks can attract increased deposits, which will in turn result in an increase in reserves.

The Zimbabwe banking sector suffers from a historical mistrust. The central bank needs to work with banks to look at innovative ways to promote financial inclusion. For instance, the statement shows that at least 26% of banking income is from fees and charges to its consumers. I recently requested a list of charges from a local bank and was astounded to see charges for use of cash machines. Banks should be making income from product development not banking charges.

For example, the informal sector should be enticed through affordable business innovation instruments. Unfortunately, Fintech innovation in Zimbabwe has been undermined by sporadic policy decisions such as currency conversion decisions, lack of transparency and an unclear direction on key policy drivers such as de-dollarisation.  Policymakers would do well to address these, otherwise the policy statement remains only applicable to the very few formal and fully banked enterprises.

As I stated in earlier submissions to this one,  the fact that the whole world is impacted by the global pandemic means that there is some room  for developing countries  whose supply chains are more easily adaptable to gain an economic advantage. However this will strongly depend on non-despotic socio economic policies that are geared towards ensuring resilience. Local small scale producers who are more adaptable can easily become key players in the supply-value chain both locally and regionally. However such a position can only be attained through transparent accommodative economic policies which are reflective, reformative and geared towards restoration.  Overall I find the MPS of February 2021 inadequate in that regard.

Mutambasere is a Zimbabwean developmental economist and  technology architect based in the UK. These weekly New Horizon articles are co-ordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. — kadenge.zes@gmail.com and mobile +263 772 382 852.

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