eBusiness Weekly
The Monetary Police Statement of 2023 issued last week by the Reserve Bank of Zimbabwe announced a range of modest changes, but is hardly the revolutionary document that some seem to have interpreted it as, and several commentators need to think about what it did not say or do, as well as what it did say and do.
Sherlock Holmes pointed out once that the dog not barking in the night was even more important than the dog barking in the night.
We need to ponder exactly what RBZ governor Dr John Mangudya was trying to achieve. He summarised this in one sentence: “The Bank maintained a tight monetary policy stance and adjusted policy rates to align them with positive inflation developments to consolidate and sustain the current price stability and resilience of the domestic economy.”
This is hardly a revolutionary statement, and we need to think of the Reserve Bank senior staff, their advisors and the Monetary Policy Committee as very conservative sober people in dark suits, and about as a far as you can get from the president of the National Bank of Cuba between November 1959 and February 1961, Dr Ernesto “Che” Guevara; that iconic image that once adorned 100 million posters and T-shirts was taken at a funeral he attended when the head of the central bank.
In the quite detailed Monetary Policy Statement there were some changes: the policy rate, the minimum interest banks are allowed to charge on their loans, was cut from 200 percent to 150 percent; the foreign currency retention percentage for exporters was raised and standardised across the board at 75 percent, regardless of their sector and regardless of which exchange their shares traded on, or even whether there were any shares to trade; the retention for domestic transactions in foreign currency was raised to 85 percent.
There was some useful information. Foreign currency fundamentals continue to improve. Last year incoming foreign exchange was US$11,6 billion and payments totalled just US$8,6 billion, an incredible US$3 billion gap equal to a quarter of what flowed in. The fact that the current account balance at the end of the year was a tenth of that, US$305 million, suggests that a lot of delayed payments and overhangs were eliminated. We know the delays on payments of auction allotments were eliminated, which accounts for some, but there must have been other delayed payments in the system. But both figures suggest that the Zimbabwe dollar should be strengthening, not weakening.
The one policy change of note was the decision that the official inflation rate for tracking purposes was to be the blended rate, basically the weighted average between inflation in local currency and that in US dollars. The Reserve Bank casually tossed in the information that 70 percent of transactions are in foreign currency, although did not say whether this was by value or transaction number. The result is probably the same once you remember all those US$1 sales by pavement vendors and in kombi fares.
ZimStat has been calculating the blended inflation rate for some time so there has been that option of which rate to choose. The important point is that every business, and probably every person, needs to know three rates now: the blended inflation rate, the Zimbabwe dollar inflation rate and the US dollar inflation rate, which the Americans are trying to push down from close on 8 percent.
As with all averages, the blended rate tells us a lot about the economy in total, but since hardly any businesses or any individuals will have payments at close to 70-30 in a currency mix, everyone will need to work out their own personal weighted average to know where they stand. Averages have their uses, but those uses do not include telling us what is happening in any particular company. Even the specific rates in each currency are a sort of average, based on a basket of goods and services, with hardly anyone buying exactly that basket each month, but at least they give us this in a single currency.
So what did the Monetary Policy Statement not say or do. For a start it made zero mention of any potential or actual legal changes. Buyers still have the absolute right to choose the currency they make domestic purchases in, and the official exchange rate is still the interbank rate, what the Reserve Bank now prefers to call throughout the statement the Willing-Buyer Willing-Seller rate, or even the WBWS. And critically there is no retreat on the longer-term policy of gradual dedollarisation of the economy as everything comes into line, including foreign and local inflation rates.
Shortly before the Monetary Policy Statement the Reserve Bank’s Financial Intelligence Unit stressed this lack of legal or policy changes when it announced that a new group of companies were to blacklisted from Government contracts for buying foreign currency in the black market and a group of wholesalers had accounts frozen for using black-market rates. So change there is not on the agenda.
The shift in policy rate was, many might think, both somewhat overdue and on the meagre side. For the last five months month-on-month inflation has been below 4 percent and declining, and reached 1,1 percent in January. This annualises to less than 15 percent with the highest in that being annualised at under 60 percent. But the RBZ appears determined to ensure that borrowers pay seriously real interest rates.
They have a point. Some tend to worship the annual inflation rate, still at 230 percent, despite the fact that it gives almost zero useful information as to what is happening, or even what happened over the past 12 months, since most of the annual rate comes from the cost of living figures in just five months. The graph shows a gradual rising trend line up to March last year, then that mountain between April and August, with a June peak, then the gradual falling trend from the fairly low September figure. You need three mathematical equations to describe that process, so it is a discontinuous function.
The Reserve Bank sees the policy rate remaining effectively positive, but drifting down as inflation remains low, although Mangudya did make it clear that it will go up if people start messing around with borrowing for speculation.
The new standardisation of retentions for exporters and for domestic businesses was long overdue. It moves retention from the incentives to the ordinary and removes degrees of unfairness that bothered many.
The new standard automatically increases the average export retention from 60 percent to 75 percent. This is not dollarisation by the back door, as some assume but seems more of a way of using the market to distribute the growing surplus of incoming foreign currency. There appears little danger that this will accelerate the growth of foreign currency stored in nostro accounts.
Exporters still need to spend money inside Zimbabwe as well as outside, and now will be making more local payments in foreign currency. The amount that between them they could store each month will remain constant, so there will be a flow of more foreign currency into the industrial and commercial sectors, the net importers, but from their own business transactions rather than from auctions. In other words more businesses will earn their foreign currency rather than apply for it. We have already seen the falling allotments, or at least a trend of falling allotments, on the auctions.
This market distribution of currency is now possible with the black market being largely smashed as a trend setter, although as the Financial Intelligence Unit found there are some who disagree, and becoming what it is largely elsewhere, a small convenience store with a modest premium, now around 20 percent, but with 90 percent of currency conversions in transactions going through at the official rate.
Dollarisation would need a far wider distribution of foreign currency. We need to remember that the direct recipients of most of our foreign currency inflows from trade are few: the Reserve Bank when it sells gold, the Government when it collects foreign currency royalties and taxes, the mining houses when they sell the rest of the minerals excluding coal, the tobacco merchants. Added to this are the other exporters, but they do not bring in the largest amounts, and the diaspora remittances, still important but largely constant so becoming a falling percentage of inflows as exports rise faster.
With exporters spending more foreign currency locally there will be some spreading of foreign currency, but again largely within industry and commerce, and with commerce largely passing on its greater takings to industry as they buy stock. Few businesses can store large sums so people need to spend most of what they get.
This is why we see the effect of the foreign currency retentions largely expanding, and doing so fairly efficiently, the market distribution of foreign currency. The local currency block of transactions remains, as do the large numbers paid or earning their income in local currency, even if they have more access to foreign currency as this flows down the economy from the smallish number of direct export earners.
