THIS is the second part of the Zimbabwe Independent’s interaction with Reserve Bank of Zimbabwe (RBZ) governor John Mangudya (JM), during our Monetary Policy Statement (MPS) review webinar. Here, the central bank chief, who fields questions from economists, makes a frank assessment of the economy and challenges business lobbies to speak on behalf of their members. Below are excerpts from the interaction . . .
Question: What measures are you taking to reduce the forex auction system backlog?
JM: In order to ensure we reduce the backlog, we have put in place letters of credit (LCs), which we believe are going to lessen demand for foreign currency from the auction system. The demand for foreign currency for an entity like Unilever for instance, is about US$1 million per month. If they come to the auction, they come for US$250 000 weekly. If we provide them with US$2 million, for the next eight weeks they will not be coming to the auction, and we have lessened demand on the auction. LCs are there to supplement the auction system. Banks started granting overdrafts of foreign currency so that they do not cause their customers to wait for the RBZ. That way it means that we have improved financial intermediation. When we are doing all this, we sometimes suffer from a challenge which we call the trilemma challenge, which is the impossible trilemma. It doesn’t mean that we won’t face obstacles. But let’s keep producing — in industry, in farming and tourism, which is beginning to open up. In all labour there is profit, but if you spend more time talking it leads to poverty.
Q: Don’t you think people are confusing the role of the reserve bank with that of the Ministry of Finance because the central bank has been involved in quasi-fiscal operations for a long time now?
A: You should not judge us with the past. Central banks throughout the world deal in very few things. (ZNCC chief executive officer) Christopher Mugaga’s constituency deals with commodities like water, the central bank deals with the prices of money. I don’t want participants to expect anything that is outside our mandate. I saw more armchair criticism (during the webinar) so I enjoyed it and I could see this is textbook criticism, this is practical criticism, and this is evidence based criticism. So I enjoyed it. I think the panellists were referring to what they think about the economy and not what I was saying. I said criticism is very welcome, but I felt I should also criticise you since it’s a free society.
Q: Do you agree that the foreign currency auction system is only benefiting the big companies?
JM: I like that. You are the first people whom I expect to acknowledge that the small-scale auction system in this country is working. Which has seen participants growing from 30 to 700 and there is no backlog whatsoever on that SME auction. They have increased their productivity and capacity utilisation which some of you cannot see. The economy is on the move. We are on the great track to recovery, we are rebounding the economy. The same corporates which are supposed to be Mugaga’s members are enjoying it. So sometimes I wonder whether you talk from your individual basis or from your constituency basis? I can do research with you, sponsored by the RBZ. We go to the ZNCC, to your members because sometimes there is a discourse which I get from people with white collar criticism and people who are in the office, there is a difference. It is not true that Covid-19 decimated this economy.
Q: Will the foreign currency auction system continue?
JM: The auction system is going to continue. We have no problem refining it. It’s a Dutch auction system. It is not the RBZ that comes to bid, it’s the corporates in their own right who approach their bankers and say ‘I want to purchase from the auction system’. You give your own rate, not Mangudya’s rate, what we are only doing is to host the system and tell you what you said you have come for. So how then does the central bank move the rate upwards when it is you individuals and businesses coming with your own price? We never tell anyone.
Q: Why is the reserve bank auctioning foreign currency that’s not available? We already have a backlog?
JM: This question is from a lack of knowledge about how foreign currency auction systems are conducted. Auctions, whether you go to Nigeria, Ethiopia or wherever, how do you fund the auction? You fund the auction from export receipts, the surrender requirements of 40%. And we know the export trends of these companies, they don’t export on a daily basis. If you look at platinum companies, they bring foreign currency once a month, so because foreign currency comes once a month from those platinum companies — who are the largest contributors of foreign currency to the auction system by the way — it means that when you have got a backlog of four weeks or three weeks, you know the money is going to come anyway. It is about cash flow management and cash flow management is not about living from hand to mouth. This is why we are talking about letters of credit. There is something called supply credits. If you ask all these companies that are benefiting, they will tell you that it is working.
Q: Tell us about the currency reform roadmap.
JM: Our roadmap is very clear. Right now we are in a multiple-currency system. So let’s stay the course. We are very clear and I also want the market to be very clear. We are in a multi-currency system right now. That is what we are and it’s very clear.
Q: Why is the RBZ giving service stations foreign currency weekly when there is almost no service station selling fuel in local currency?
JM: About 25% to 30% of our fuel is sold in local currency and 70% to 75% foreign currency. The fact that you are not seeing Zimbabwe dollar fuel does not mean it does not exist. It is there. The major fuel operators that sell fuel in Zimbabwe dollars are the major oil companies. These include Petrotrade, Genesis, Total, Engen and Zuva. These are the major oil companies in this country and whenever they get foreign currency from the central bank (they sell in Zimbabwe dollars).
Q: Money supply growth trends are a worrying phenomenon.
JM: The question people should be asking is that where is this money concentrated? The money is skewed in very few corporations in this country. On the exchange rate, I am not sure we can afford a rate of US$1:ZW$90 and above for our school fees. So we need to ask ourselves who are the drivers of this parallel exchange rate. Those are people with money. We need to be very honest there.
Q: What is the right exchange rate and inflation targets for 2021 and 2022?
A: We are expecting inflation at between 25% and 35% in 2021. For 2022, our projections are that if we continue what we are doing we end inflation at between 10 and 20% in 2022. We are targeting money supply to control inflation and exchange rates because there are the pass-through effects of exchange rate dynamics into the pricing system. We are very focused on what we are trying to do and if you are focused, you achieve what you want to do. On blocked funds, we prefer to call them blocked funds as opposed to legacy debt because we have blocked funds which are not paid because of lack of foreign currency. On blocked funds we have worked quite a lot.
We have been paying on a gradual basis. We are working on that and we have taken note.