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‘I want to tame inflation before I leave’

BY  SHAME MAKOSHORI

RESERVE Bank of Zimbabwe governor, John Mangudya (JM) recently headlined a monetary policy statement review webinar hosted by the Zimbabwe Independent. After his insightful presentation, our Business Editor, Shame Makoshori (SM) followed up to get the central bank chief to elucidate several issues that came out of the webinar. Here is how their discussion turned out.

SM: You are in your second and final term as governor. How has the experience been?

JM: Let me start by thanking Alpha Media Holdings and the Zimbabwe Independent for having organised a very insightful webinar on the review of the recent Monetary Policy Statement. The discourse was quite useful and beneficial. The experience of serving the bank has been both an honour and an inspiration. My second and final term, which took effect from May 1, 2019, has been substantially different from the first term on account of the different economic policies pursued by the government during these two terms. The first term was under the dollarisation era and the current term started at a time when Zimbabwe had introduced its local currency which necessitated the introduction of the interbank foreign exchange rate management system. Whilst the transition to the use of the local currency gave the bank scope to conduct all the traditional monetary policy functions of a central bank which had been curtailed during the dollarisation system, the introduction of the local currency was met with mixed reactions and anxiety. The anxiety and the dollarisation hysteria led to a significant increase in inflation that reached 175,7% in June 2019 compared to an annual inflation of 2,9% in June 2018. Thus, whilst my first term was focused on managing the impact of low aggregate demand and competitiveness of the economy, the focus for the second term is completely the opposite. The main focus of the bank now is to achieve and maintain price stability. This positive development gives me sufficient confidence that the bank will be able to bring inflation further down to single digit levels within the Sadc benchmarks before the end of my second term.

SM: The revision of growth targets to 7,8% was a surprise, governor.

JM. The current rise in economic activity is not a surprise. Zimbabwe is not an ailing economy. It is a growing economy. It is on the rise. It is growing on account of the economic policy measures put in place by the government and the bank to stabilise the economy and create a conducive environment. This growth is also supported by a good agricultural season which is providing the backward and forward linkages with industry. The economic growth is also consistent with the economic rebound of 6% expected this year for the global economy. The country’s external sector has also been performing well, benefiting from firming international commodity prices. On account of the strong external sector performance, foreign currency receipts have remained buoyant. The increased foreign currency inflows have enabled the productive sectors to have ease access to foreign currency for importation of raw materials and machinery. In view of the strong external sector, the Balance of Payments position of the country is therefore healthy.

SM: Some economists have said the inflation rate might be declining because of lower consumption due to lockdown.

JM: While it is true that low aggregate demand is generally associated with dampened inflationary pressures like what happened during the dollarisation era, evidence on the ground shows that aggregate demand this time around is quite strong. Aggregate demand in Zimbabwe has significantly gone up on account of the growth of the agricultural sector, industry and the mining sector. For instance, to date, the government has paid more than ZW$30 billion to grain farmers and more than US$500 million was earned by tobacco farmers. Industrial capacity utilisation and business volumes have also gone up. These all contributed to buoyant aggregate demand which could have caused inflation to rise. More importantly, the conservative monetary targeting framework and exchange rate stability have greatly assisted in anchoring inflation expectations which were the major drivers of inflation instead of aggregate demand factors.

SM: You have said banks have begun granting overdrafts in forex to companies. Why were they not coming to the party before?

JM: The move by banks to provide foreign currency loans to foreign currency generating entities is a welcome development as it will go a long way in relieving pressure on foreign currency demand on the auction. Previously, the low foreign currency deposit base had been a major constraint for banks to advance loans in foreign currency as they had to be cautious of the maturity mismatch risks. On its part, the bank continues to play a supportive and supervisory role to ensure that funds are utilised in line with best practices.

SM: Will borrowers be liable to pay interest on the overdrafts granted after delayed foreign currency receipts, or the RBZ takes over the expense?

JM: The overdrafts advanced by banks are part of their normal lending business and the terms and conditions for such lending differ from bank to bank. As such, borrowers will be bound by the terms and conditions of the loan agreement with their respective banks.

SM: This forex auction system has held its own, compared to 2004, when it failed.

SM: The sustainability of the current auction system is determined by its design and financing mechanisms. The current auction system is designed along the Dutch auction system and financed sustainably through 40% surrender by exporters, 20% liquidation from domestic foreign exchange sales and from the Exchequer account. The continued increase in foreign currency receipts has ensured sustainable financing of the auction system through these sources. The timing mismatch between the receipt of foreign exchange from these sources and the weekly allotments of foreign exchange from the auction system has to a greater extent resulted in a backlog under the auction system. As advised during the insightful webinar, the bank is addressing this phenomenon through a number of measures that include refining the auction system, reducing pressure on the auction through the use of deferred payments in the form of letters of credit and enhancing government’s contribution to the pool of funds for the auction.

SM: The bank has been lending to productive sectors. How different is this from the quasi-fiscal operations that took place during governor Gono’s time?

JM: The bank currently supports the productive sectors through its Medium-Term Bank Accommodation (MBA) facility which is a normal central bank instrument classified under open market operations. This operation can take the form of either short-term/overnight accommodation or medium to longer-term operation or accommodation. The MBA lending facility is designed alongside the common longer-term refinancing operations used by central banks across the world. The facility encourages strategic productive sectors during difficult times such as pandemics. The current support to the productive sector is different from quasi-fiscal activities which refer to budgetary activities carried out by a central bank in the form of an explicit tax, subsidy, or direct expenditure that has or may have an impact on domestic money supply. Previously, these took the form of direct or indirect support by the bank to key sectors of the economy such as agriculture i.e. farm mechanisation and support to parastatals. The bank has ceased all quasi-fiscal activities.

SM: Tell us about the outlook, the next 12 months.

JM: The economic outlook is bright. I am very optimistic about the outlook. We expect inflation to fall below 20% in the next 12 months on account of prudent financial and economic policies, increase in production and productivity and financial inclusion. The low inflationary environment will go a long way in enhancing the store of value function of the Zimbabwe dollar and in the process reduce the demand for foreign currency for store of value purposes. Our policy measures will continue to be focused on ensuring that the public becomes indifferent between holding foreign currency and the local currency. The country’s external sector is expected to remain strong. The robust foreign currency performance will greatly assist in achieving durable exchange rate stability. The rebound in the global economy supported by the recent SDR allocations and stimulus packages in the developed world and Asia will also support further growth impetus.

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