Hopes pinned on Monetary Policy

Taurai Mangudhla
Reserve Bank of Zimbabwe Governor Dr John Mangudya faces the Herculean task of living up to expectations when he delivers his Monetary Policy Statement soon.

Since coming into office in 2014, Dr Mangudya has delivered a number of Monetary Policy Statements, excluding reviews, but this is perhaps his most crucial one as it comes hard on the heels of leadership change in Zimbabwe.

President Mnangagwa has emphasised the need for economic turnaround and international re-engagement and Dr Mangudya’s Monetary Policy Statement is expected to reflect the same.

Although Dr Mangudya’s hands  remains largely tied due to the country’s decision to adopt multiple currencies in 2009, thereby taking away some of the key monetary policy instruments from the central bank, the apex bank chief has room to manoeuvre around exchange controls in order to stimulate production and business growth.

Economist Mr Brains Muchemwa said easing exchange controls can incentivise capital inflows into the economy that has suffered capital drought for two decades.

“At a time the market is getting positive signals from the new dispensation, the RBZ has a huge task to ease Exchange Control Regulations in order to incentivisse capital inflows into the country,” Mr Muchemwa said in emailed responses to The Sunday Mail Business.

According to figures obtained from the RBZ, Zimbabwe’s foreign direct investments fell by 30 percent to US$295 million in 2016 from US$421 recorded in 2015.

In 2014, the country enjoyed US$545 million of FDI.

Mr Muchemwa said in light of the fiscal and monetary authorities’ admission of the existence of excessive liquidity that has caused distortions in the currency and goods markets, expectations are high for the RBZ to begin aggressive sterilisation activities.

The Confederation of Zimbabwe Industries (CZI) recently called on Government to stop flooding the market with Treasury Bills which have left the monetary sector vulnerable.

This will be part of the economic sterilisation programme which is meant to counter price increases and cash shortages. Sterilisation is premised on the central bank limiting the effect of inflows and outflows of capital on the money supply.

lt involves the purchase or sale of financial assets by a central bank and is designed to offset the effects on the money supply caused by a balance of payments surplus or deficit. However, this move has been described in some circles as one of the least practical solutions to the prevailing challenges.

“The effectiveness of the sterilisation programme will be dependent on the ability of the Government to exercise utmost restraint with regards to its expenditure and management of the budget deficit levels,” said Mr Muchemwa.

Economist Dr Tapiwa Mashakada said the multi-tier pricing system that has seen the cost of basic and mostly imported goods skyrocketing needs to be tackled.

He said inflation targeting is going to be a major issue which needs to be addressed in the Monetary Policy Statement given the rising prices on the back of high parallel market premiums.

According to the Zimbabwe National Statistics Agency (Zimstat), the country’s annual inflation rate rose 0,49 percentage points to 3,46 percent in December 2017, from the November 2017 rate of 2,97 percent.

Despite the recent increase in the price of some items, annual average inflation closed the year at between 3 percent and 5 percent, in line with the RBZ’s 2017 year end inflation projections.

The year-on-year food and non-alcoholic beverages stood at 6,6 percent whilst the non-food inflation rate was 2 percent.

Dr Mashakada said Dr Mangudya is expected to give measures to either curb or blunt the impact of Treasury Bills on money supply growth.

“The market is expecting to see the sterilisation of the impact of deficit financing on the price levels,” he said.

Dr Mashakada also said a policy pronouncement on the future of bond notes is also expected, given the recent debate on the isuue.

“The issue of nostro accounts and failure by exporters to access forex is a major issue likely to be addressed,” Dr Mashakada said.