MPC keeps tight monetary policy

After the devaluation of the ZiG at the end of September there was a surge in monthly inflation in October and a modest jump last month, remembering that out inflation figures reflect mid-month to mid-month increases in the cost of living, rather than calendar months.

However, most have noticed that the premium between the interbank market and the black market has come down again to its “normal level”, although it is necessary to compare like with like, that is bid rates with bid rates and ask rates with ask rates.

The black market, unlike the interbank market, does not have a mid-market rate.

Some of the more outlandish comparisons have been made between the black market ask rate, what it sells the US dollars for, with the bankers’ bid rate, what they pay for dollars.

The margin in the two markets is also dramatically different, a few percent between buy and sell rates at banks and up to 30 percent, and sometimes even more, in the black market.

The Monetary Police Committee of the Reserve Bank of Zimbabwe was making the points of stability in inflation after the devaluation jump and lower premiums between the large official market and small black market as justification for retaining a tight monetary policy.

So the bank policy rate stays at 35 percent. This is the absolute minimum interest rate a bank can charge a borrower but statutory reserve requirements and risk factors mean that even favoured long-term customers with excellent credit ratings will almost certainly have to pay a little more, and most customers definitely more.

What the committee appears to be doing, by stressing the lower inflation levels and the reduced premium between foreign currency markets, is making it clear that borrowing at 35 percent for speculation purposes on stock exchanges, which is legal, or moving back and forth between black markets and the banks, which is not, are both a mug’s game that will lead to ruin as costs exceed potential profits.

This is fair enough and the bank policy rate has been set for some time at levels that strongly discourage speculation and arbitrage, even if these also damage normal productive borrowing and hamper businesses.

The messing around by those who feel that the big profits should go to those who can move money around the fastest, or fill in forms the best, has caused a lot of damage and making this very difficult will benefit the productive sectors by preventing meltdowns.

That 35 percent interest rate should also cool the ardour of those who want to borrow for consumer purposes, and that is useful. Consumer borrowing does both increase liquidity for little gain and drive inflation, when we look at the experiences in other countries.

But moving from credit to cash for purchases does require in turn a reasonably stable economic environment. Zimbabwe’s saving levels are low, almost all inside the pension and insurance sectors rather than in personal and business deposit accounts.

Zimbabweans were pushed for years by a number of companies to open credit accounts and revolving credit accounts, and the general collapses of the 21st century have done much to end that although there are ways, especially for those with US dollar incomes, to buy on credit although they should work backwards and see what sort of interest they are paying, even for what amounts to a US dollar loan.

One reason China was able to develop so quickly when the private sector was allowed to operate and grow was the savings culture in that country.

For many years Chinese people did not borrow and did not buy on credit. It was shameful to do either, let alone more costly.

This was a culture very foreign to Zimbabwe and Zimbabweans, especially since the start of hyperinflation when there might be good reasons for looking at credit, but saving was still rare in the days before the old Zimbabwe dollar collapsed and far too many consumers had multiple credit accounts that caused them serious distress at times.

But in China, with the different culture, people saved up to buy everything for cash and those savings, some of which were fairly short-term but others longer term, could be mobilised by banks into productive loans.

There were no markets for other kinds of loan, so the temptation for banks to try and attract consumers and speculators, was limited.

That again kept banks on the straight and narrow.

But Zimbabwe’s productive sector does need access to something below 35 percent and in the end only marginally above the annual inflation rate for the currency being used in the loan.

The Monetary Policy Committee sensed this problem and talked about it, briefly.

“In light of the current tight liquidity conditions and the need to minimise the impact on economic growth and support the productive sector, the MPC resolved to introduce a Targeted Finance Facility (TFF) administered through the banking system.

“Operational modalities of the facility will be communicated to banks in due course.”

That paragraph at least sets down the intent, although everything else must be settled, including the interest rate, the size the fund and just what it can bent for.

Past productive funds, smallish in size, had interest rates set at half the bank policy rate, a fairly crude set-up and hopefully the new targeted finance facility will have a more sophisticated set of calculations.

We would suggest an interest rate equal to the rate of inflation, or perhaps a whisker above it, would at least keep the fund as a viable resource, not a way of subsidising some of the more favoured borrowers.

The size of the fund needs to be as large as possible but again, with a positive interest rate, it will automatically expand as new resources are
added.

The real test of the fund will be the list of purposes for which it can be used. We would suggest barring all purchases of income-generating assets for a start.

Obviously buying shares and other paper assets would be barred from the start, and it is fairly easy to bar purchase or developments of property assets.

But then we move into the greyer areas of say an expansion in branches among those retailers and even producers who have multiple branches.

Sometimes it will be difficult to bar such expansion from the cheaper loan funds, although most of the expansion in this area is fairly obviously for internal resources rather than any loan funds.

There will be some very tricky calls to make. For example, obviously a new vehicle for a CEO will not qualify for cheaper loans.

But a company could divert money it should be using for productive purposes to buy the vehicle, and then borrow at the lower rate for the original productive purposes.

This sort of cheating will occur unless there is quite a bit of investigation for every assignment of the special fund loans.

The sort of market distortion such special funding can produce is always a worrying point, but then so is the fact that ordinary bank policy rate has been set at a different level for different purposes than those a commercial bank might set for commercial reasons.

The targeted financial fund, although a distortion, is meant to counterbalance the distortion on a bank policy rate designed to
fight speculation rather than for commercial purposes, or even set as an anti-inflationary measure,
although this is more common globally.

Part of the package of problems facing the central bank is how to juggle between the actions needed to combat one evil or press ahead with one desirable goal and the actions then needed to combat the distortions introduced by those same original actions.

It is probably worth noting that pure markets do not exist, especially when speculators are allowed to roam through them.-ebsinessweel