Monetary Policy in the dollarisation era: Difficult, still, Dr Mangudya tries

Reserve Bank of Zimbabwe governor, Dr J.P Mangudya

Dr Mangudya`s central bank peers the world over have gained a great deal of prominence over the years, as fiscal policy as an economic recovery tool has taken a back-seat at the expense of monetary policy. Subsequently, the clout of central bank governors globally has rapidly increased and in no small part, due tools such as Quantitative Easing that enables central bankers to create liquidity. Unfortunately, this is not quite the case with Zimbabwe`s Reserve Bank governor. Be that as it may, Dr Mangudya has tried to make the RBZ relevant in the current multi-currency era, which limits the possibility of conducting an independent monetary policy.

The themes of the RBZ governor`s monetary policy statements (MPS) over the years, have largely centered around reform and structural transformation of the economy, and the current one proved to be no different. Dr Mangudya appears to have taken a cue from former White House economist, Catherine Mann`s seminal work on dollarisation titled “Dollarisation as Diet.” In it, she says, “Policy-initiated dollarisation is like wiring your mouth shut to lose weight. It is effective in the short-run, but unless you undertake lifestyle changes (eating habits and exercise) you are not a healthier individual, just a thinner one.” This is as much relevant to Zimbabwe today, as the case is ever so apparent that Zimbabwe largely requires a structural economic shift to prime it for take-off.

Zimbabwe`s financial sector is relatively solid underpinned by modest bank performances lately. In any case, performance of the country`s financial system is largely dependent on the overall health of the whole economy. To this extent, most market watchers were looking at the MPS with a particular interest on policy pronouncements speaking to debt clearance efforts, macro-economic growth, restoring economic competitiveness, increasing capacity utilization and curbing the negative inflation.

This year`s MPS was against the background of negative inflation year-on-year, with no underlying inflationary pressures existing as well as greater volatility in the rand/dollar exchange rate, which has hamstrung the economy. Perennial current account deficits also show the extent to which the macro-economy warrants intervention.

Gold and Diamond Mining

The mining sector has traditionally been Zimbabwe`s dominant sector and the move to have Fidelity Printers and Refiners to buy gold from artisanal miners on a ‘no questions asked basis’ is noble, notwithstanding the softer prices on the international markets. Zimbabwe has a relative comparative advantage in the gold mining sector, and it would make sense to boost the production of the yellow metal, and so prop up export receipts and currency reserves. However, in the long term, the gold mining industry does not look to be the answer that Zimbabwe needs. Increased costs of deeper-extraction, slowing global demand contribute to a very uncertain future for the gold mining industry.

And onto the huge ‘elephant in the room,’ that is the vastly underwhelming diamond mining sector. So much is the shroud of secrecy surrounding activity of this sector that no one really knows what is going on with this sectoer. Talk of transparency and sanitizing the diamond sector has been doing the rounds for years, with no visible change. It seems there is no political will or otherwise to strengthen this sector and insure that it contributes positively to the economy. Consolidation of the  diamond mining activities will happen as planned but it is difficult to foresee a marked change in this sector`s performance in the near-term. The 6,000,000 carats annual target is for all intents and purposes a castle built in the air.

Plugging leakages

In view of the consistent trade deficits the country has been running, coupled with the leakages through the direct exportation of liquidity offshore, the only real option left for the economy to finance these shortfalls is through borrowing. Nonetheless, the country has not been able to borrow from international finance institutions (IFIs) due to its debt overhang. As such, it would be imperative to follow through on the re-engagement with bilateral and multilateral creditors, as the country seeks to clear its external debt. The MPS as anticipated, highlighted the funding mechanisms for clearing the $1.8 billion debt owed to IFI`s, measures which include drawing down on the country`s SDR from the IMF and a bridge loan from the Afreximbank. However, the unintended consequence of this strategy is that additional negative pressure is exerted on the economy and the whole process will have to be managed carefully.

The RBZ governor could not have been more accurate in stating that the economy`s main problem is not so much little capital inflows as it is a problem of inefficient use of capital. Even if the floodgates were opened today, and new capital is injected into the economy, it would simply be funneled outside the system through illicit flows and various other leakages. This problem is not only peculiar to Zimbabwe; a recent study by a high level panel chaired by Thabo Mbeki showed that Africa loses at least $50 billion annually through illicit financial flows. As such, policy interventions by Dr Mangudya to plug the leakages in the economy are commendable. This should be complimented by prudent fiscal discipline all-round to ensure that the little liquidity there is in the economy is utilized efficiently.

Zimbabwe is likely going to have problems with its Balance of Payments, it is crucial for the country to increase the competitiveness of its economy, in order to boost exports. This would entail, promulgating policies that improve the ease of doing business and deregulation of the foreign trade procedures. Though a lot of work still needs to be done in this regards, this latest monetary policy statement sets the tone for the direction the economy needs to take, and removes policy uncertainty in this regard.