Monetary policy needs to be announced

When will the monetary policy statement for the start of the new year actually come out? This is of major concern to a lot of people in the markets at the moment, with changes over the last couple of months that were never announced and hints of a new currency that have never been confirmed.

This will be Governor Dr John Mangudya’s last monetary policy statement, as he leaves office in April after two terms and 10 years at the helm of the Reserve Bank of Zimbabwe, the maximum permitted by law, and is being replaced by Dr John Mushayavanhu.

The early announcement of the changeover, made in December last year, has given Dr Mushayavanhu more time to become familiar with this new job, so there should be no delays while he finds out what is going on.

But Dr Mangudya should be making the last monetary policy statement of his double term, and should be making it soon if everyone wants to start calming markets.

The delay is possibly because of the need to work out everything very clearly in advance this time, rather than proceed by way of emergency reaction, and perhaps the recent visit of the team from the International Monetary Fund saw some consultations and opinions on what is being planned.

There has already been a dramatic revolution in the allocation of foreign currency over a little more than two months.

There have been no auctions this year, neither the small retail auction that turned into a shadow of its former self after the bankers were brought in, nor that wholesale auction for bankers that was largely setting the interbank exchange rate and responding to signals sent by the Reserve Bank and more powerfully by the Ministry of Finance, Economic Development and Investment Promotion.

In the last set of major moves, the Ministry took over the job of buying the 30 percent of export earnings that exporters have to sell when the money arrives in Zimbabwe.

This meant that no money supply could be created to do the buying; the Ministry could move money from its local currency account to buy the foreign exchange but that would have to go right back into the foreign currency account. In effect, the dealing by the Ministry produced a zero change in the Government cash holdings.

The Ministry then used this money, or at least a significant slice of this money, to fund the wholesale foreign currency auctions, where only the commercial banks could bid.

The banks were running their own operations, buying currency from some of their customers to sell to others, but all were also dipping into the Government pool in the new wholesale market.

That suddenly came to an end at the end of last year, when the wholesale auctions closed. They have not reopened.

The banks are at the moment running the dealings in the whole official foreign currency market, setting the exchange rates and generating the interbank official rate without modification from auctions.

The Finance Ministry appears to be keeping the 30 percent of export earnings it buys for Government and Treasury requirements, adding it to the foreign currency it earns through taxes and fees.

The Government foreign currency bill is rising.

There is not only the salary component of State employees, but also spending on a lot of the agricultural sector, the inputs for small scale farmers and the cash flow needed for buying a good chunk of the produce from farmers, chunks of other Government spending and, of course, dealing with the foreign debt.

This need for the formal sector to only partially rely on what their bankers can buy from net exporters sort of works because of the reduced foreign currency demands by the importing sectors.

A major source of foreign currency now for the formal private sector is what they take in through their tills.

They still take a lot of local currency, and the formal sector is not just legally bound to allow the buyer to choose the currency but has to face this choice is being enforced.

But that still means a lot of foreign currency requirements are now earned by the net importers, who only have to top up from their bankers.

The formal private sector is also tapping some of the foreign currency in the informal sector, an area where the US dollar reigns largely supreme.

But the informal sector is not a closed economy, or at least not a totally closed and separated economy.

Those operating in that sector do have to buy a fair amount of stuff within the formal sector, and they will be buying in US dollars.

The informal sector is largely fuelled by the diaspora remittances for new money, although the money within that sector does rotate between participants.

There is not that much in the way of precise statistics, but it seems reasonable that the money flowing into the informal sector each month is roughly equal to the money flowing out, either in imports or in purchases within the formal sector. There must be a sort of balance in place.

The International Monetary Fund was keen on seeing the retail premium of 10 percent vanish, seeing this as an inflationary pressure.

It is certainly a distortion but we need to be realistic and see that if the retail premium was dumped the interbank rate would rise rapidly 10 percent more than it would otherwise have done.

What is likely to happen, considering the flows of foreign currency that go directly from individuals and businesses to the suppliers, would probably not swing through the banks instead, so the bank rates and thus the new equal till rates would rise to match what would have been the case if the premium still pertained.

Admittedly this would reduce liquidity, so there would be some gain, but the way people think would suggest a rise in exchange rates rather than a decline.

The retail premium was introduced to give retailers a reasonable chance to compete with the black market dealers.

Everyone talks about the black market premium as high over the official rate, but the figure that gets quoted is what the dealers sell US dollars for, not what they buy the US dollars for.

The black market has and has always had wide margins between the bid and ask rates, even when what dealers seek varies considerably.

So the retail rate is not much at all below what those with US dollars can get from a dealer when they sell foreign currency, so a lot will prefer to sell the foreign currency to a shop.

But the gap between the retail rates and the bank rates does impose a distortion in the market, and will help accelerate the trend for everyone to chase their own tails, and so the IMF does have a point, but possibly not as critical as they would assume, as economists tend to do, that everyone in the market has perfect information and perfect logical sense.

The withdrawal of the Finance Ministry from the auctions has seen the local currency depreciate, not as fast as the crashes seen in the second quarter of last year, or the annual crashes in previous years, but still noticeable.

It has also tended to cement the use of the US dollar as the pricing currency even if in the formal sector buyers can choose how to pay, with the exchange rate changing daily.

There was a feeling that the local currency was still overvalued, despite the general wish to have a stable local currency and stable exchange rates.

So perhaps the authorities are not that upset at what is probably a correction, but it cannot continue correcting, and certainly not at the present speed.

The South African rand shows the sort of movements a respectable third world currency from a non-oil exporter behaves, and it has now reached R20:US$1. But this is just halving in value over 15 years and easy to cope with.

Hints given this year have suggested moving the Zimbabwe dollar to becoming a “structured currency”, that is probably one backed by reserves in foreign currency, gold or other minerals or the whole range. There are other possibilities.

But if there is some sort of major revamp in process the Finance Ministry and the Reserve Bank will need to have a large area of agreement, despite the theories that the fiscal and monetary authorities have to be independent.

For start the fiscal stability is to a degree predicated on monetary stability, so they are not separated policies.

The point is, that changes have been made, more changes are in progress, but almost nothing has been announced or said, and monetary policy appears to be being made by the Governor flying by the seat of his pants.

At some stage he has to tell us what the agreed policy is, at least agreed by him and his successor.-ebusinessweekly