Digesting the monetary policy

Persistence Gwanyanya
LAST week , the Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya through the Mid-Term Monetary Policy Statement on August 2 and the presentation made the following day at the University of Zimbabwe — took time to unpack monetary interventions to deal the current cash shortages on the local market.There was also an effort to steer the economy through the present challenges.

The Governor simply put the shortages into perspective by noting that the country’s monetary challenges are essentially a function of foreign currency shortages.

Judging by the amount of money in circulation, estimated at US$1 billion, the economy is adequately liquefied.

Impliedly, growing the country’s exports should be the country’s priority.

Consistent with this position, the central bank would prefer to continue with the export incentive scheme in the wake of competitiveness challenges brought about by the use of a strong US dollar.

The central bank explained that its preference for the US dollar as the reference currency was largely informed by the need to maintain confidence in the economy.

It also noted that integrating the local economy to the Rand Monetary Area, which might be a precondition for the use of the South African rand as a reference currency, is not advisable since trade between the two trading partners is transacted in US-dollar terms.

The export incentive scheme remains a preferred mechanism to liquefy the local economy through injection of bond notes.

As such, the central bank had to arrange an additional export incentive facility for $300 million (to make a total facility of $500 million) under a Standby Liquidity Support facility from Afreximbank.

Reflecting the realities on the ground, where electronic money and bond notes are trading at discounts as high as 30 and 25 percent respectively, the central bank announced that the export incentive scheme (EIS) will continue.

A complementary $600 million Nostro Stabilisation facility for $600 million from the same bank will also help.

In fact, these facilities are timely in view of the deepening parallel market for currencies.

It is envisaged that they will ease pressure on both nostro and local payments and also concomitantly address the parallel market for currencies. However, there is concern that if the deep-seated structural challenges affecting production are not addressed, these facilities would only offer temporary solution to the cash crunch.

Needless to mention that, if left unchecked, corruption will weigh down all efforts to rebuild.

An important observation to make is that the increase in bank deposits from $6,99 billion as at June 30, 2017 from $6,55 billion the previous quarter, which is partly occasioned by nostro funding challenges, has created a need to unlock the local RTGS balances to create nostro capacity.

This is necessary as there are many exporting companies which are failing to secure money for their production needs, yet there is a lot of dead capital lying in the banking system.  Similarly, there are many companies that are sitting on huge balances because they cannot repatriate dividends as well as pay for their imports.

As such, the established the Zimbabwe Portfolio Investment Fund to facilitate efficient repatriation of portfolio-related funds is a viable measure to improve investor confidence. But there is need to allow private sector participation to compliment the $5 million seed capital set aside for the project.

Also the idea needs to be tied to mechanisms of using RTGS balances, currently difficult to access – to unlock nostro capacity for dividend repatriation as well as supporting the nostro funding position.

Whilst the apex bank contends that the major challenge in the economy is in respect of forex shortages, it would be difficult to separate the shortages of the local currency – RTGS, bond notes and coins  from the former.

The high preference for cash, which has given rise to the three-tier pricing system, has seen the massive discounting of local currency.

It sounds ironic that with more than $1 billion cash in circulation, the country is still experiencing challenges.

Ostensibly so, because with total deposits of US$6,99 billion, the country would ideally need cash stockpile of $1,1 billion being 15 percent of total deposits for smooth functioning.  However, the cash challenges today partly reflect challenges in electronic payments systems.

The increase in system down time, errors, reversals and duplication have resulted in increased demand for cash in the country, which threaten the traction made on electronic payment platforms so far.

A cumulative 2,5 million RTGs transactions valued at US$27,4billion were settled through the RTGS system between January to June 2017, accounting for just above 70 percent of total transactions in the economy.

Of concern is the increase in the Treasury Bills (TBs) in the economy, which have topped US$2,5 billion as at June 30, 2017.

The bulk of these instruments did not go into production, but expunging RBZ legacy debt.

In order to minimise the effect of these TBs on inflation, the instruments have different maturity profiles.

Going forward, it’s important to minimise reliance on local debt, especially for budgetary support, as this might crowd out the private sector.

However, the renewal of the $200 million African Export-Import Bank Trade Backed Securities (Aftrades) facility with the Afreximbank at an increased level of $400 million for another two years could be a measure to strengthen the banking system in view of vulnerabilities created by cash challenges.

As such, despite all ratios pointing to a sound banking system, the sector remains vulnerable, which calls for continued vigilance by the RBZ.

 

Persistence Gwanyanya is founder of Percycon Advisory. For feedback whatsapp on +263 77 3 030 691 or email on [email protected]

 

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