Of monetary policies, supply side and Zimbabwe’s prospects for growth: Brian Tawanda Manyati

This in addition to another to another non-politician, a professional banker at the helm of RBZ being Dr. Mangudya.

 

By Brian Manyati

 

The Monetary policy (MP) statement got announced this week. What is it? It is deliberate actions by the Reserve Bank of Zimbabwe (RBZ) to influence the monetary aggregates, namely interest rates and exchange rates. All through credit availability to in-turn affect monetary demand, national output, national income, inflation, economic growth and the balance of payments (BOP).

Like it is with most things, intentions on the part of the RBZ are good, idea is to positively influence stated hereby.

How did we get here

The RBZ during the hyper-inflationary era was seized with cushioning the value of the then official currency, the Zimbabwe Dollar (Z$). That was up to 2009.

The terms “appreciation” and “depreciation” of a currency are used when a flexible (floating) exchange ratesystem is in operation, the fact that, pre 2009, we were using the terms like “devaluation” of the Z$ (in the case of a depreciation)and “revaluation” (in the place of an appreciation) means that we basically were under a fixed exchange rate system.

In the recently announced monetary policy, the devaluation route has not been used with the surrogate currency (Bond notes) which together with other multiple currencies have replaced the Z$ post 2008.

Confidence level/s

National election outcomes have a bearing on confidence levels of the general populace. Any who may have preferred a different vote outcome may understandably not want to receive any policy in good faith, so long it is from a rival political party now the ruling party.

Some therefore, totally ignore policy pronouncements, some pour cold water, others outright ridicule and all that is to be expected. On another hand, appointments to key national office roles too have a bearing on business confidence levels.

Business runs with professionalism and asks if the appointees are qualified professionals, right people for the right job? The recent appointments to the key Ministry of Finance and the accompanying Permanent Secretary, were a step in the right direction at increasing confidence levels of industry and commerce, also the appointed heads being young.

This in addition to another to another non-politician, a professional banker at the helm of RBZ being Dr. Mangudya.

Of course, demands and expectations do not stop, we even hear in some quarters, calls for even more e.g that lead figures in monetary roles be reputed foreigners instead forexposure and greater independence. In change management theory, there are plusses and negatives no matter the change agent is internal (locally bred) or external.

Consistency

The consistency as regards settling the external debt is laudable from the retiring finance Minister to the present. We definitely need a good credit rating so let us repay.

Execution of the LIMA plan is in order.Since the inclusive government or post hyper-inflation days, the RBZ has not been able to operate its monetary policy thrust at full throttle, as such efforts to fund the central bank should continue to get adequate attention.

The credit rating bureau set up 2015/16 was another positive step whose effects shall definitely show.

Do we have market failures?

Failure in which markets? In financial markets. They are the markets where individuals and organizations with surplus funds lend funds to other individuals and organizations that want to borrow. There are intermediaries in between.

Commercial banks, finance houses, mutual societies and institutional investors such as pension funds and investment funds are examples of such intermediaries.

 

Let us safely characterize the prevailing black market as a negative externality, a result of a formal market failure.

A result of financial indiscipline. Money for production is not supposed to be going there at all but it is spending days there in the speculative and informal money changers hands. A market failure occurs when the market system is unable to achieve an efficient allocation of limited availability resources, money included.

It is important that the RBZ Governor pinpointed openly the RBZ is not participating in this parallel market. Furthermore, he stated money there is coming from people who will have gotten it from banks. That is polite. We have a market failure.

My simple thinking is, the FCA account versus corporate current or individual bank account is therefore, in order. No matter the terminology used for specifics, end of day separation of a foreign currency account holding and tracking both inflows and use of other multiple currencies other than the Bond Note is okay.

It removes a loophole that was there and very possible some clandestine banks or bank employees were using that opening to fund black market activities.

The reality

How? Here is an example. At some point I received USDs from a sender abroad. Unable to however, redeem my foreign currency receipt from my bank, duly working with a receipting money transfer agent, on my own volition, and out of being told the USD is lacking I accepted a Bond note equivalent amount at 1:1.

Let us assume I am not the only one. The bank will eventually receive the forex either at international clearing house or from the money transfer agent.

Such foreign currency surpluses, including free foreign currency deposits where there is no demarcation of electronic funds or RTGS deposit from the USD deposit, as was happening, can end up getting directed clandestinely to the black market.

Therefore, post policy pronouncement, any foreign currency deposits made prior, should be traceable backusing documentary evidencee.g deposit slip.

Saving households too keep deposit slip copies and can help enforce.

Say commercial banks were napping in this malpractice for whatever reason be it survival, not good corporate governance, recommendable is to follow the saver/depositor`s money at the black market where it went unofficially to ensure either the correct reserve ratios or minimum physical cash is in volts in line with the requirement to pay bearer on demand.

This no more promotes black market from banks side, leavesg major non-bank corporates with surplus funds as next to deal with.

Accessing more money

That the FCAs will be supported through a facility already nearing finalization between RBZ and Afrexim Bank is a good move, just more monitoring is needed at the bank intermediary level with the FCA account holder who upon depositing their foreign currency receipts expect no excuses from their bank at point of withdrawal.

When our Zimbabwean government announces it is accessing more money for the Bond Facility we should conclude aim is an expansionary monetary policy which entails an increase in the money supply so as to bring about a decrease in the interest rate in order to increase the demand for goods in the economy.

This excess supply of money causes a decrease in the interest rate. From an angle this move is anti-inflationary. However, the financial market has been failing on this part.

The Finance Minister in his complementary statement is therefore, potentially right in asserting let there be an auction trading system for Treasury Bills for a smooth connection point between the RBZ and the commercial banks.

For instance, that the RBZ was having to peg e.g the maximum and minimum lending rate, a form of a price control, was indicative of an intervention due to a market failure of over pricing money when left alone.

Supply side economics

Supply side economics, neither Keynesian (fiscal) nor Friedman based (monetarist), merely place focus on increasing the aggregate supply of goods and services in the economy.

Recommended are cuts to government spending to cause the release of more limited resources available to even the private manufacturing industry in our case, in addition to e.g command agriculture subsidization.

How does the Zimbabwean government create savings for release to the private sector? Supply side economics proposes e.g privatization of state owned enterprises.

Recent reports citingthe State Enterprises Restructuring Agency (SERA) executive director that 16 state enterprises are earmarked for privatization, if successfully executed, mean purchase consideration money to government. Jobs in part are saved, not all are lost in transition. Privatizations hammer the major cause of the budget deficit, the hefty civil service wage bill.

Deregulation calls are also supply side in nature, things such as the ease of doing business, aim being to free producers or operators from red tape of government bureaucracy, same time stimulating innovation and investment.

All this reduction or incentivisation of the current corporate tax rate from 25.75% including aids levy to 15.45% for a company that exports above 50% of its gross turnover is all supply side in nature. Special tax incentives that face the operators in the planned Special Economic Zones (SEZs) as well.

The point is not to look atthe tax cuts as dampening government revenue, rather tax cuts serve to stimulate the economy and reduce the budget deficit.

Recommendations

I once recommended as follows in a different article on underpinning the role of inevitableSMEs in Zimbabwe using this supply side reasoning.

That “while I am not condoning failures to remit tax, the 100% penalty and interest of 10% p/a chargeable on the outstanding tax for the period the amount remains unpaidis too much.

Tax breaks or tax reliefs such as given to Export Processing Zones and Special Economic Zones should be afforded by Zimra to micro and SMEse.g granting them first five or six years’ operating tax free or paying just token tax, staggering payments due longer above one year coupled with a possibility of part waiverson a show of early payment commitment of provisional estimate or current tax.As start-up entities successfully survive as going concerns, the more revenue Zimragenerates from a widened tax net.”

 

Brian Tawanda Manyati is a qualified Chartered Secretary and Administrator and a Certified Accounting Technician, IFRS Expert & Content Reviewer who writes and makes, entrepreneurial, business, socio-economic and political analyses from a business and economic angle in his own personal capacity. He is contactable on +263772815211 or tawandamanyati@gmail.com, and on facebook.

 

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