Insight: My reservations with the Monetary Policy

31 Aug, 2014 - 06:08 0 Views

The Sunday Mail

INSIGHT with Clemence Machadu

Yours truly joins the rest of Zimbabwe in giving accolades to central bank governor Dr John Mangudya for an innovative expansionary Monetary Policy.

I doff my hat.

Dr Mangudya’s policy totally defies the cowboy adage “never approach a bull from the front”, as he has tackled the charging proverbial bull by the horns, a clear sign of boldness.

I could not agree less with him when he said: “It is so deep-rooted in my heart and I have faith and optimism that Zimbabwe’s economic recovery is in sight.” More so when he said: “Thank God for where He has taken us thus far.”

Key amongst the reforms proposed by the Monetary Policy include the formation of an asset management company that will buy the ever-growing non-performing loans, currently pegged at US$705 million. The asset management company apparently has such an appetite, as we are told it has already chewed 6 percent of these debts.

The policy also proposes to bring finality to creation of a credit reference bureau, which allows banks to share clients’ financial health records as a proactive way of checkmating loan defaults.

Good again. Just as good as other reforms being proposed, too bad, space won’t allow me to detail them.

It is just my few reservations that I wish to dwell on in this discourse, as we endeavour to foster recovery and growth of our economy.

The policy singled out stimulating increased production of goods and services as a means of boosting economic growth and fostering other macro-economic fundamentals.

I believe that mere increase of production will not be a sustainable end in itself: we need to ensure the goods we create find a market — both local and international.

It is not just an issue of boosting production, but bringing about a paradigm and pragmatic shift that fosters productivity and competitiveness throughout value chains.

We can increase mealie-meal production to cloud level, but who will buy it when we are producing the most expensive maize in the region?

I beg to differ with the Reserve Bank when it says we need “to embrace the philosophy of building around the operating companies and not mending what is not broken” to foster quick economic recovery. We cannot just ignore non-operating companies that have potential to bring quick turnaround.

If we build around operating companies, we will be contradicting the Industrial Development Policy, which has prioritised sectors that foster industrialisation. Many of the companies falling in these prioritised sectors are not presently operating.

The qualifying criteria for those priority sectors were partly that they “can be developed without need for massive amounts of capital resources … (and that) the sector should also have a quick turnaround period”.

The fact that a company is operating does not mean it will give us quick wins compared to a non-operating one.

It is also flawed philosophy to say we should not mend what is not broken, and I am surprised that it is coming from our very own central bank. Should we wait for a company to shut down before we do anything to help it? Should we be reactive when we can be proactive?

The philosophy of not fixing what is not broken is not in line with the need to grow the economy, reduce unemployment, and foster other macro-economic virtues. We cannot wait for all hell to break loose for us to start acting.

I believe we actually have to come up with a flagging system for companies, whereby we categorise them according to their operational health, for example, green for those operating well and red for those collapsing, with other colours falling in between.

That will allow us to quickly take corrective action.

Having introduced a cocktail of foreign currencies in the January 2014 Monetary Policy, one would have expected the central bank to educate the public about their security features.

We are using nine currencies and the majority of the populace does not know what the yen, yuan or rupee looks like. Yet they are expected to accept them as legal tender, resulting in folk being duped with counterfeits.

The central bank should take measures to ensure the public is conversant with the security features of these currencies.

If the monetary authorities cannot do that, who will?

When the central bank removed the memorandum of understanding governing interest rates and bank charges, the thinking was to allow market forces to cast their lots. Thus, we now have self-regulation, and bank charges and interest rates have blown through the roof.

This was also noted by the Finance Minister, in his 2014 National Budget, when he said: “I have, however, noted with concern the recent astronomical increases in bank charges by some of the banking institutions.”

The hypocrisy we are getting from banks is seen in the fact that even though money supply has increased, they have not lowered interest rates, but increased them in the majority of cases.

Total banking sector deposits increased by 4,86 percent from US$4,73 billion as at December 31, 2013 to US$4,96 billion by June 30, 2014. Banks have proven that they cannot self-regulate, and I recommend that Minister Chinamasa act on his warning in the National Budget statement that: “I would like to sternly warn such institutions that Government will not hesitate to regulate bank charges and interest rates if banks fail to self-regulate.”

So much for self-regulation!

The Monetary Policy says the central bank has formed a forum with the Bankers’ Association of Zimbabwe to review, on a quarterly basis, bank charges and interest rates and also established a Banks CEO Forum that meets quarterly to share ideas.

This is what economists call moral suasion and we know decisions from such interactions cannot be enforced mandatorily. Who is afraid of something that doesn’t bite?

It is my fear that these interfaces will be nothing but talk shows where bank executives eat snacks and drink coffee.

Again, the issue of coins has been mentioned.

“In order to ameliorate this problem of change and its unintended consequences on the price levels in the economy, the Reserve Bank shall be importing special coins of 1c, 5c, 10c, 20c, and 50c whose values would be at par with the US cents. Rand coins of 10c, 20c, 50c, R1, R2 and R5 are also being imported to buttress the multiple currency system,” reads part of the Monetary Policy statement.

Previous fiscal policies have pledged and given time-lines on the issue of coins.

What has changed this time around? What measures have now been put in place to ensure we will have coins?

Banks imported millions of rand coins a few years back, but they found no takers due to exchange rate asymmetries.

The coins were returned to South Africa, leaving banks with only shipping expenses on their income statements.

Similarly, the importation of US coins is expensive. It was cited then that it costs about US$1,50 to ship US$1 worth of coins.

What we do not want is another version of false promises from our authorities. An ideal solution might be to simply mint our own coins that serve the purpose.

I agree with Dr Mangudya that there is need to expedite issuance of bankable and transferable leases to qualifying farmers, as they are considered better forms of security than offer letters and current leases. This is absolutely necessary to boost agriculture financing.

A fundamental strategy implemented by the Asian Tigers was land reform with security of tenure resulting in increased agricultural production and income levels of farmers, as well as improved savings and domestic demand.

The monetary policy also advised Government to acknowledge the responsibility to compensate farmers for improvements on farms that were acquired under the Land Reform Programme as “consistent with His Excellency, the President, Cde RG Mugabe’s stance that compensation for improvements would be done when financial resources become available. In this regard, the Bank is pleased to note that Government has since 2011 paid compensation in an amount of around US$5 million.”

The above is also happening at a time when British authorities are pushing our Government to make annual pension payouts of at least US$25 million to its citizens who were civil servants under the Ian Smith regime.

Public Service, Labour and Social Welfare Minister Nicholas Goche is on record as saying: “As Government, it is our desire to pay all our obligations, but the sanctions imposed by Britain and her allies have curtailed our capacity to pay most of these obligations . . . how are we going to afford to pay British citizens whose government imposed sanctions on us?”

It is my view that Minister Goche’s position should unreservedly apply to compensation for farm improvements.

Even the central bank itself called for “the removal of sanctions as the restrictive measures continue to have a debilitating effect on the economy,” arguing that the sanctions “are quite disproportionate given the small size of the Zimbabwean economy with a GDP of around US$13 billion and total banking deposits of around US$5 billion”.

At the moment, we should focus on raising money to finance agricultural and industrial production, and Britain can catalyse this process by lifting sanctions.

This will also result in them getting their money within a reasonable amount of time.

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