‘Crisis? What crisis’: Mthuli Ncube speaks on currency controversy

(picture: Cynthia R Matonhodze/Bloomberg)

Finance Minister Mthuli Ncube spoke to Zimpapers TV on Thursday about the government’s latest economic measures, including the suspension of bank lending. Here are excerpts of the interview: 

IS ZIMBABWE IN AN ECONOMIC CRISIS?: No, it’s not in crisis. Our growth projection is strong, we still expect growth closer to the 5% that we projected, we may tamper with that but we’re still seeing a positive upturn in the economy, which began in 2021.

MARKET INDISCIPLINE?: It’s basically (economic) agents not adhering to the law, to regulations, whether it pertains to the way the currency is treated, (or) trading in the parallel market, which is disallowed. All manner of indiscipline that we see, the way they go around investing in the equity market or in the forex market itself, the way prices are raging in the retail sector. All of that indiscipline is something that we need to deal with and we will make sure that we enforce the measures that were put in place to deal with this indiscipline.

WHY SUSPENDING BANK LENDING?: We are not the first country to do this. In fact, within the African continent, we are aware that Ethiopia has also done the same, suspended lending. These are temporary measures, so our measure is quite temporary. What we are trying to do is to prick the speculative bubble which has emerged in the forex market as well as in the equity market.

What we have found out, we have information and we know some of the perpetrators, they were using banks to borrow cheap liquidity, cheap in the sense of negative real interest rates to then speculate, take positions on the parallel market but also then route some of the proceeds onto the equity market and then keep playing around, between the equity market and the parallel market and so forth. So we had to prick that bubble and this is how we decided to do it.

WHY NOT RAISE INTEREST RATES?: We could have done both, raise interest rates and suspend all lending, but we decided to do one. If you raise interest rates sharply to deal with speculation, sometimes you tend to punish the honest, those who are in the real sector who are productive, who have borrowed genuine loans. And it will increase the non-performing loans problem, the NPLs go up. So we don’t want to punish the honest and increase the NPLs, we would rather deal with the speculation by constraining the liquidity that you are giving to them to speculate. As I said, it’s temporary, we will get to a point where we will again loosen up and open up.

ON CURRENCY DEVALUATION: The fundamentals that determine currency movements are strong. We have, for the first time, in a very long time, reserves at the central bank of a billion U.S dollars. That hasn’t happened in years. I talked about the other fundamentals, which are a strong current account position, a strong fiscal policy position and a very strong monetary policy stance, a tight monetary policy stance. The fundamentals for a strong currency are in place, yet we see this situation, which has to do with indiscipline, hysteresis, with rent-seeking behaviour which is inherent in any situation where a population has come from a hyperinflationary environment. It could (also) be a function of the fact that we have a dual currency system which, of necessity, we must have because we don’t have balance of payments support, we don’t have access to offshore credit lines easily so we need to harness the U.S dollars which are already in circulation and we’ve been using the auction market in the main to direct those U.S dollars to sectors that need them the most, which is the importers, and that has worked quite well.

ON THE PARALLEL MARKET: The parallel market is exhibiting an asset price bubble, being the price of foreign currency, but that’s also what you see in the equity market. So the idea was to prick the bubble of speculation and begin to constrain certain behavioural practices that were just pushing this speculation and causing havoc in the market. What we’ve also done, you will see the measures that the president announced included an increase in the transactions tax for use of U.S dollars. Again, that is meant to tilt preference towards the Zimbabwe dollar. We also decided to say that the ZIMRA rate for the payment of duties should be the willing buyer, willing seller rate which is closer to a rate that we believe is market determined.  

FOREX AUCTION SYSTEM: The president’s announcement was very clear. He said the central bank should sell the forex that it has and nothing more and also that all payments should be made within a period of 14 days and that’s what the central bank is going to do. So, what that will do, to make sure the auction lives within its means. At the same time, we’ve introduced a willing buyer, willing seller window to further improve the price discovery process and I think that’s gone a long way in that direction. It’s a continuous improvement, in terms of getting to the right exchange rate. But the auction has delivered big time, in terms of being a source of forex for importers. That’s why you find that our industries are booming, the quantity of goods that are on our shelves is at a record high, easily 70% of the goods on our shelves are locally produced. It’s because producers have access to forex for the first time in a long time. The price is another issue, but they have access to foreign currency. Even the gap, as long as they know that they will receive the foreign currency, which they eventually do, they keep going and they’re doing great. We will eliminate the backlog, for sure.

THREE DIFFERENT EXCHANGE RATES?: The willing buyer, willing seller rate is a market-determined exchange rate. We are committed to improving the price discovery process for currency in this economy. We’re going through a transition, yes, we may have two, three exchange rates, we’re going through a transition, we’re still reforming and some of the measures we have taken are really meant to deal with that, to make sure we narrow the spreads between these markets and then we can eventually get to some kind of convergence and we’re of course searching for that equilibrium. We will get there, I’m sure of that.

We want to make sure there is uniformity and sanity.

CONTRACT PAYMENTS TO BLAME FOR CURRENCY WEAKNESS?: Yes, we as government found out that certain of the contractors who are doing a good job building infrastructure projects are also changing their monies in the parallel market, particularly the foreign contractors. We have taken some action in that direction. First of all, we have reduced the number of foreign contractors on our infrastructure projects. Secondly, we’re making sure we’re paying a part of what we owe them as government in hard U.S dollars so we reduce the Zimbabwe dollar element.Then on the Zimbabwe dollar element, we are also spreading out that payment, so that they don’t rush to the parallel market in one fell swoop and cause these blips that we see. We are aware of this and we are managing it. We will deal with it.

ON MONEY SUPPLY GROWTH: We have been keeping it in check, but (it’s) not enough. At least that’s what the speculators are showing us, that we needed to do more and we’re doing more. We now have a target of M0 growth at 0% per quarter for the rest of the year. That’s a commitment to tight monetary policy. Restricting lending is a way to control M2 and M3, so that again is a measure to deal with growth in money supply. So, we are dealing with it. Tight monetary policy on one front, tight fiscal policy on another and taking other measures to promote the use of domestic currency.

ON EXCLUSIVE OF OF ZIM DOLLAR: At the moment, Zimbabwe cannot afford to have a sole Zimbabwe dollar used as the legal tender and nothing else. Why? We need the U.S dollar at the moment because we don’t have credit lines that can easily be accessed by our banks to support our industrial sector. It’s a real problem. We lost many credit lines in the past because of our arrears, issues with sanctions and so forth. So, we have no choice but to have a hard currency like the U.S dollar circulating domestically, then we can harness the U.S dollars that are circulating within the economy through an auction or some kind of platform like an auction. Then we direct the U.S dollars to the sectors that need them. So this is a necessary situation. It’s transitional. One day we will have a monocurrency.

70% of the transactions in the last 12 months are in domestic currency, not hard currency, and that’s a good thing.

LATEST MEASURES AND INVESTOR SENTIMENT: You want to know that there is a tough government that can take tough decisions. We have taken tough decisions such as suspending lending, that’s a very tough decision. That’s what investors should understand, that that’s what it takes to run things well. They should be happy with these kinds of measures. 

EXPECTED OUTCOME OF LATEST MEASURES: We see stability in the exchange rate, that’s our expectation, through these measures. We see the bubble in both the equity market and parallel market being pricked by these measures. We see, perhaps, more usage of the domestic currency. If we don’t get those results, we’ll do more. We have more measures in our back pocket, I can tell you. An arsenal that we will unleash to make sure that we bring sanity to the economy. We want good growth, we want our citizens to be happier, we want more incomes for our citizens, we want inflation to come down, we want happier citizens, that’s really the intention of what we’re trying to do.