RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya has revealed that the Monetary Policy Statement (MPS)’s effectiveness is under pressure as it is currently catering for the formal sector which only makes up 40% of the economy.
The Zimbabwe Independent can report that the remaining 60% which makes up the informal economy has been pushing its own financial system away from the supervision of the central bank.
This is however a cause for concern considering that monetary policy is a set of actions available to a nation’s central bank to achieve economic growth. The current revelations point to a gloomy future.
Due to the current informal status of the economy, economists say 40% of economic activity is formal while 60% is informal with others suggesting higher figures of 25% and 75%, respectively.
This has since been confirmed by the growing mismatch between reported economic growth by authorities and independent groups despite high levels of poverty on the back of a depreciating Zimbabwe dollar.
The livelihood of Zimbabweans has been under serious stress as a result of economic growth failure. This was also noted by the World Bank (WB), World Food Programme (WFP) and the American risk agency, Fitch Solutions.
“We have a dual economy where the informal economy is bigger than the formal economy. Some people put it at 60% informal while others put it at 75% or 70% but I would love to say 60%,” Mangudya said during a review of the 2022 Monetary Policy Statement this week by the Zimbabwe Economic Society.
“The MPS is formal policies that affect formal business meaning the other side of the market is not affected as much with the MPS…The duality continues apart from the rural and urban that we used to learn at the University of Zimbabwe. Once an economy is not formal it means that policies become blunt instruments,” he added.
The central bank chief gave examples of how monetary policies do not affect the informal sector such as the quarterly money reserve targets that were reduced to 7,5%, from 10%, in the 2022 MPS.
“Who does it affect? It affects banks in the formal economy, it does not affect people who are in Mbare Musika (market) or that are in Glen View where they are making furniture, no, it does not…so how do we make these two economies talk to each other? That should be the challenge,” Mangudya said.
He noted that one way to make the formal and informal sectors converge was to promote usage of local currency so that people holding onto the greenback have enough motivation to sell.
“We need to create a strong, super demand for local currency so that at least whenever you have your foreign currency, you will be able to sell it and also get a product priced in ZW$,” he said.
Both Finance minister Mthuli Ncube and Mangudya have been accused of putting policies that do not benefit the populace like how the former kept the tax-free threshold ZW$25 000 (US$210,31), below the cost of living.
Some of the ineffective policies in the 2022 Monetary Policy Statement, released on Monday, are cash withdrawal limits raised to only ZW$5 000 (US$42,06) per week, from ZW$2 000 (US$16,82). It was also announced that mobile banking transactions between person to person would now be ZW$10 000 (US$84,12), from ZW$5 000, with a limit of ZW$70 000 (US$588,87) per week.
Person to business, mobile banking transactions, were raised to ZW$25 000 per transaction from ZW$20 000 (US$168,25) with a maximum limit of ZW$100 000 (US$841,25) per week.
Lastly, Mangudya scrapped the weekly US$50 facility where people could buy at the official rate from bureaux de change. This facility is now limited to selected sections.
The changes were made despite a spike in the prices of goods and services with the government beginning to follow the parallel market in pricing its basic services.
Economist Tinashe Murapata said the RBZ needed to engage the informal market before it could create its own monetary system.
“The central bank and policy makers need to be sensitive to the market. If they are not sensitive, the market is telling them ‘this is what we want to do’ and they keep going one way and the market will be the winner. That game, they will lose to the market,” Murapata said.
Zimbabwe is still blooming in the sense of an informal cash society.
“The informal market is not yet formalised but if we continue this dual economy and with continued public distrust in the monetary system, it will develop its own financial services system outside your (the RBZ’s) financial system. So you need to be cognisant of what the market is telling you,” Murapata added.
He said the governor should let the market have a voice in the formulation of some policies that affect them.