By Chenayi Mutambasere
RECENTLY, the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya addressed a panel on the economic outturn. As the panellists raised concerns over the monetary policy statement (MPS) and way forward, he was quick to point out that panellists were missing out on the role of the central bank.
Examining the role of any central bank particularly where there is an economic crisis, one finds that the principal role of the apex bank in light of the global crisis caused by Covid-19 is to provide a monetary lifeline to mitigate the impact of the pandemic on households.
All central banks should be at the forefront of policy response because it is money that makes the world go round and the sudden emergency break caused by Covid-19 can result in domino effect, leading to an unprecedented financial crisis.
In these circumstances, the central banks are the knight in shining armour that determines whether economies sink, sail or swim as they navigate the pandemic storm. A swift forceful response by the central bank is critical and many banks across the world have responded in this exact way.
Close the leaks
Like any ship navigating the storm, the first thing the captain does is to attempt to close off any cracks so that the sea water does not contribute to the crisis and result in the ship sinking deeper.
For Zimbabwe, the key leakages are happening through the mining sector and the foreign exchange auction. Countries that are mining, specifically the yellow metal have been able to rely on its stable and increasing revenue throughout the pandemic. In Zimbabwe, this has not been the case — the monetary policy statement (MPS) between 2020 to date reports declining gold revenue.
In the past, the ministry of Finance has claimed that the country loses US$1,8 billion from gold smuggling. The Minister of Home Affairs, Kazembe Kazembe, went on record with a claim of US$100 million of revenue loss on a monthly basis due to smuggling.
Due to the loss of foreign currency through smuggling it is critical that the central bank is seen at the forefront of addressing these leakages.
The relationship of artisanal miners with Fidelity Printers, which is a Reserve Bank of Zimbabwe (RBZ) owned entity, is also part of the problem as it only pays miners well below market value, such that unofficial trading appears more appealing.
This gaping hole must be addressed beyond just Fidelity Printers but an influence on policy to address the needs of artisanal miners. To date, there have been three cases made public in the last year to do with gold smuggling but no evidence of investigation and/or recovery.
The second leakage point is via the interchange auction loses US$0,45 for every US$1 sold via the auction. This grande level of leakage for a country struggling for foreign reserves is unjustifiable. This is an indictment on the governor’s tenure.
They should not be afraid to allow the market to determine the price as a pegged regime can never work as an ad infitium strategy. It is tom-foolery to think that the central bank can just wish away the parallel market. The economy responds to the laws of basic supply and demand.
For as long as a currency crisis persists in Zimbabwe, there is a demand for currency dealing. It is a matter of fact that we are waiting for the RBZ to eventually release a list as long as the last census because every Zimbabwean is a foreign currency dealer as a direct result of the archaic economic policy.
It may well be feasible to issue out currency that is available through the interchange auction as business banking loans for the SMEs. The return on investment for Zimbabweans would be far better than the perpetual losses incurred via the interchange auction.
Business loans in USD would inject much-needed liquidity in a more equitable way for the Zimbabwean economy. Such an intervention would of course require the support of a complimentary fiscal policy but the central bank should be leading the cart. The pegged interchange auction is the biggest fraud in Zimbabwean history seconded only by the infamous 1:1 Bond currency regime.
The third leakage point is the multi-currency system. This has impacted adversely on the perception of financial services industry by private householders. This manifests as mistrust which means hardly anyone keeps most of their money in local banks.
To explain the gravity of this leakage — if as a diaspora community member wishes to remit money to relatives, I will use money exchange centres such as World Remit and immediately there is a transaction cost of nearly 5% opposed to if I was doing a direct transfer from a UK bank account to a Zimbabwean bank account.
This means the buying power of households is immediately reduced due to transaction costs. Alas, attempting to use international VISA cards in Zimbabwe is like playing the lottery you are never really sure what rate the international clearing system will apply.
On aggregate Zimbabwe must lose millions of foreign currency from transaction costs caused by a multi-currency level. Simple things like not being given your change when you purchase using USD/Rands soon add up on aggregate and indeed over time.
The nuances of a multi-currency system mean that not all offshore banks are comfortable clearing payments to Zimbabwe. In addition, the majority of households in Zimbabwe have not bothered to open a local foreign currency bank account indeed with good reason.
Given the activities of the past where balances are changed from one currency to another the persistent multi-currency scenario fuels mistrust by private households. Having single currency immediately reduces the transaction costs and other exchange rate losses incurred.
While dollarisation makes the most sense at this point, the Reserve Bank of Zimbabwe should set about a clear direction of travel to reduce leakage.
Since the beginning of the pandemic, the central bank has persisted with a conservative policy approach, which has seen the building up of reserves amidst a crisis. While it is important to maintain a good reserve balance if the central bank put in place the measures to reduce leakages, the reserves would not need to be at the expense of starving Zimbabweans.
Increasing reserve balances that are concurrent with increased poverty figures makes little sense — in fact they are almost pointless. An accommodative policy approach would enable the central bank to target certain market segments that are likely to be the most vulnerable.
For instance, this could be through enabling banks to undertake low cost lending, in particular, for the informal sector that is servicing more than 60% of the country’s adult population. Other accommodative policy changes would see a reduction in the policy rate, which is currently at c.40%, a prohibitive rate for most SMEs. Policy rates have a wide reach ranging from private households expenditure to investor market confidence.
The Reserve Bank of Zimbabwe should be spearheading policies that are aimed at restoring confidence and sustaining consumption through private expenditures.
However, currently the buoyancy of the parallel market is a vote of absolute no confidence. If this remains unchecked the damage to the economy will be long term and deep routed.
To save the future, Zimbabwe is in a desperate need of urgent policy introspection from its central bank. If we can get the basics right, other vanilla mechanisms can be implemented to sustain the economy through policy rate management, repurchase operations and asset purchases.
If any such mechanisms are rolled out, present day benefits will be eroded through the gaping holes outlined. Mangudya must urgently address these leakage points as the first captain of this sinking ship!
- Mutambasere is a writer, development economist and technology architect.