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The Reserve Bank is Sabotaging the Recovery in the Economy
When Mthuli Ncube was appointed as Minister of Finance he quickly took charge at the Ministry, appointing a new Permanent Secretary and several Directors and publishing a Transitional Stabilisation Plan. He is not a politician and has no desire to be one, so he depends on the President when he has to deal with those in the Government who have different views to his own and who might want to protect entrenched interests.
He quickly recognized that the existing path on which the economy was travelling was a road to nowhere. Had we maintained the policies of the Mugabe era we would have ended up in the wilderness – massively in debt and crippled by slow growth and unsustainable domestic consumption founded on subsidies and a bloated Civil Service. As the new Permanent Secretary said at the time ‘we have to stop the bleeding and get the patient into ICU as quickly as possible’.
It has worked and most economists watching events here are saying that the new team has done much more than expected in a very short time. This recognition is now official in that the International Monetary Fund has recognized the progress made and granted us a new Staff Monitored Program which could, if managed properly, bring us back into the multilateral fold in 2020. But much more work remains and the biggest obstacle to progress is the Reserve Bank.
In the Gono era at the Reserve Bank he virtually took over the management of the economy, imagining that he could print money without constraint and thereby keep the economy going. In economic terms this was almost childish and showed little or no understanding of the realities of macro-economic and monetary policy. His ability to sweep what foreign currency was available into the accounts of the Bank and then allocate it to economic and political players made him one of the most powerful figures in the country – but he wrecked the economy, destroyed all savings and almost brought the Government down – creating the conditions that led to the defeat of Zanu PF in 2008 elections.
Did he understand just how much damage he was doing to the country and its people? It seemed as if he had no idea that his activities were at the very epicenter of the cyclone that turned Zimbabwe into a failed State between 2000 and 2008. But so long as he produced whatever foreign currency that the State President demanded, he was safe; until the GNU. Even then the new Governor was no independent professional – he was a Gono side kick who had succeeded him at the helm of CBZ, the largest commercial bank in Zimbabwe.
No sooner had he assumed control at the Reserve Bank than he moved to maintain the role of the Bank as a center of control and distribution of hard currency. He introduced the Bond Note – which he bizarrely claimed was not a currency – even though it patently was a currency. Even more bizarre was his claim that the new currency was freely exchangeable, even though it patently was not. By 2017, had he offered to exchange real US dollars for Bond Notes the queue outside the Bank would have stretched to Beitbridge.
Under the new dispensation the first sign of trouble came in the monetary policy statement issued by the Governor just before Christmas. In that statement was a single, short statement that the Bank was to establish a ‘Monetary Policy Committee’ which in future would be responsible for monetary policy, independent of the Governor and the Minister of Finance. This is standard practice in all countries with a stable currency. I heard a rumor that this inclusion in the Statement has been forced on the Governor by the new Minister and his team.
It is now April and still there is no MPC. In its place the Governor initiated a campaign to deny the Ministry of Finance any ability to effect real changes to monetary policy and to effect changes in the administration of allocation of scarce foreign currency. Not difficult when the numbers of consumers of foreign currency far outweigh the producers and many are heavyweights in the political arena. Under John Mangudya’ s regime, it was possible for the Government to buy hard currency earned by our exporters for local RTGS dollars printed at will by the Bank as a means of funding the 40 per cent deficit in State spending.
Under this system a new luxury car for a Minister of Senior Official would literally cost nothing. It had been the same under Gono and he had used this capacity, not in the service of the country, but to service his own system of patronage. We heard stories of secretaries getting luxury vehicles like gifts from the Governor. The Reserve Bank was determined not to relinquish its control over hard currency and monetary policy. Time and time again the Governor repeated the adage that the local currency (which was not a currency) was valued at 1:1.
The struggle intensified in the first quarter of 2019. Eventually the President himself was forced to intervene between the two arms of Government and he dictated a compromise. The result was the Monetary Policy Statement issued five weeks later than promised and containing the words ‘willing seller, willing buyer’. Like the sentence including the announcement of the formation of the MPC, this was included over the strong objections of the Reserve Bank.
What the Minister of Finance has done over the past 9 months is to announce that the RTGS and the Bond Note are both currencies. He has stopped printing money and now has both a fiscal and a hard currency surplus over current demands. He has drawn a distinction between the RTGS and the US dollar and forced the rate at which the Reserve Bank buys hard currency from exporters to start at 2,5:1 and now 3,2:1. But it has been like drawing teeth at the RBZ – each step has been painful and drawn out. They know they cannot openly disregard the instructions of the Ministry, but they are making sure that they hold onto as much power and influence as they can.
The result is that the majority of all foreign currency transactions are conducted, not in the official interbank market, but on street corners and in coffee shops. I told one industrialist how to secure hard currency and he did not believe me – but he went to a coffee shop in Avondale and was offered US$10 million at the exchange rate of the day (4,6:1). He was stunned. But the reality of this situation is that when the Reserve Bank instructs banks to trade only at the levels dictated by the Bank (illegally following the Monetary Policy) the rate is held back from real market levels. At 3:1 the informal market trading at 4,5:1 represents a 50 per cent premium for exporters – who can forgo that and survive?
So the real market follows – not the interbank rates now posted in newspapers and on bank walls as the market rate, but the informal market rates. And it is this rate that sets market priced for consumers because the majority of imports are conducted at these rates. In this way the RBZ actually is responsible for much of the inflation in the market at present and is therefore responsible for retarding economic recovery and stability even though the economic fundamentals are now stable and sound.
This week, for the first time the informal market rate has strengthened to 4,62 to 1 as against 4,8 to 1. We have been expecting this to happen because we currently have a surplus of hard currency. This and the fact that the fundamentals are sound means that we should see that inflation falls by year end and exchange rates strengthen to perhaps 3 to 1. This will only happen if the Reserve Bank stops fighting the Ministry of Finance and they work together on getting Zimbabwe back on the road to growth.
Eddie Cross
Simons Town 25th April 2019
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