RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya (JM) presented his Mid-term Monetary Policy statement (MPS) three weeks ago. His hawkish stance demonstrated the central bank’s resolve to keep inflation under a tight leash by containing money supply at sustainable levels. Other measures rolled out by Mangudya are expected to help the RBZ address widening backlogs at the foreign currency auction system. Last week, the Zimbabwe Independent (ZI) set down with the central bank chief in to understand more about how several crucial decisions were taken. Below are excerpts of the discussion:
ZI: We have seen backlogs at the foreign currency auction system. We have seen figures of US$200 million plus being thrown in the market in terms of the backlog. But what is worrisome is that the allocated amounts are rising to US$40 million, to US$45 million per week
JM: How do you fund auctions? You fund auctions through export receipts. We know the export trends of companies here. For instance, platinum companies bring foreign currency once a month. So because foreign currency comes once a month from those, say platinum companies, which are the largest contributors to the auction by the way, it means when you have got a backlog of three or four weeks you know that the money is going to come anyway. That’s what is called cashflow management.
ZI: Tell us governor, how do global trends affect our monetary policy in Zimbabwe?
JM: The global and domestic environment affects our monetary policy and also fiscal policy. We are affected by these two. On the global landscape factors, we are looking at a 6% rebound in the global economy. That is a positive for our country. The IMF (International Monetary Fund) will be releasing US$650 billion in SDR (special drawing rights) into the global economy on the 23rd next week (Monday this week). So that increases the reserve money in the global economy and it will drive commodity prices.
ZI: How are these linked?
JM: These ones are linked. When you put money in the economy, prices go up because prices have absorptive capacity. You want to stabilise and you absorb the money you have put into the economy. The stimulus package in the developed countries is stimulating demand in the world economy. That is why it (global gross domestic product) is going up by 6%. Also as a result, the prices will obviously need to go up because price is used as an instrument to absorb the money. Therefore, when you put money into the global economy, prices go up. Without money you do not grow and that is the context of the global. That growth context which is there is also mirrored in the Zimbabwe macroeconomic situation.
ZI: Please explain how the global growth has been mirrored in the Zimbabwean economy?
JM: If you look at our three sectors of the economy, the external sector increased by 29,1% (foreign currency receipts) during the first half of this year. We are looking at the foreign exchange system, which has been able to discharge or provide US$1,7 billion of funds through the formal system, which is quite a lot because that is about 40% of the requirements by the productive sectors of the economy. The other side is that companies also use funds in foreign currency accounts. There is also the interbank. So the interbank market plus the foreign currency auction system, plus the foreign currency utilisation in the FCA (foreign currency accounts) gives you the 100%. We have seen improved diaspora remittances and exports receipts in this country. We have also had a sustained current account surplus because of improvement in remittances.
ZI: Are these the factors that were under consideration when GDP growth targets were revised to 7,8% last month?
JM: So the external sector is bright, it is good. On the real sector, we have now increased the growth projections from 7,4% to 7,8 % on account of what we have been seeing on the ground. Agriculture (growth) is expected to be about 34%. We have seen growth in industry as more foreign currency was made available to the economy. Through results that are being presented by companies, entities are giving a testimony to economic growth. So, the economy is recovering and we are witnessing growth. We are on the road to achieve 7,8% economic growth.
ZI: Governor, tell us about the inflation outlook for 2021. What considerations were taken to arrive at the 35% inflation rate by December?
JM: We have witnessed a decrease in inflation, which is an area we are focusing on because once inflation goes down, we improve the value of our currency. It means that people become indifferent to either United States dollar, and we have also witnessed an increase in capacity utilisation. Figures from the Confederation of Zimbabwe Industries indicate that they are anticipating growth to 61% in capacity utilisation by the end of this year. Some companies are already at 85%, others are at 95% capacity utilisation depending on which entities you are talking about. So the average of 61% is achievable.
ZI: In the Mid-term monetary policy announced early this month, you indicated that you were happy with banking sector developments. Please takes us through developments in aspects of banking like non-performing loans (NPLs) and profitability
JM: On the monetary and financial side, we have seen significant increases in the deposits of foreign currency in Zimbabwe which shows confidence. We had around US$1,8 billion by the end of July. We have got sound asset quality and our NPLS have since gone down to 0,3%. The international best practice is 5% but because of the measures we have taken especially the establishment of the Zamco (Zimbabwe Asset Management Corporation), which reduced all the toxic assets from the banks, it has gone down and thank God that Zamco has also been able to pay the US$1,2 billion that was given to it by government in the form of Treasury Bills to expunge the NPLs and the banks are now firm on the ground to have good asset quality and we are quite happy about that and the productive sectors of the economy.
As we said, our view is on fostering price stability. It means that we need to stay the course on fostering price stability and our thrust in the MPS is anchored on tight monetary conditions as well as fiscal sustainability, which government has been able to do over the past one year or two and is supported by the strong external sector performance and the stable exchange rate, mainly due to the operation of the foreign exchange auction system and financial sector stability. The downside risk being of course, the Covid-19 and premiums, which are there between the official exchange rate and the parallel exchange rate. We have also put in place appropriate statutory reserves to ensure that banks mop the money to the economy into the central bank so that at the end of the day we manage inflation and we have also been giving forward guidance on inflation and interest rates.
ZI: Tell us more about your interventions on interest rates?
JM: The bank rate is 40%. So, when the banks are borrowing, overnight accommodation, it’s 40%. When we are lending it’s for them to give to their customers its 30%, own lending we put a cap of 10% so that the cost of money is achievable. In the financial side we were talking about enhancing financial inclusion, we do not want to leave anyone behind in terms of financial inclusion be it women, youth business. We have put in place a facility of ZW$500 million (US$5,8 million) to cater for the SMEs, the women, the youth and the men who are also disadvantaged in the inclusion. This is done to ensure we influence the economy.
The monetary policy is always a blunt instrument because it affects everyone and this is what we are doing and we want to maintain this framework that we have said here. Having said so, using those tools and instruments for monetary policy we know that in Zimbabwe, and the rest of the world, the growth in monetary supply is always linked to inflation. Therefore, containing reserve money is very important, it needs to be done effectively to reduce inflation.
- Next week we will publish Mangudya’s responses to issues raised by our panelists who participated in the webinar — Confederation of Zimbabwe Industries CE Sekai Kuvarika, Zimbabwe Chamber of Commerce CE Christopher Mugaga, Institute of Chartered Accountants of Zimbabwe technical manager Owen Mavengere and development economist Chenaimoyo Mutambasere.