Devaluation of the local bond-note is said to be one of the considerations at central bank ahead of Wednesday’s monetary policy statement. But that is just one piece of a complex puzzle for Reserve Bank of Zimbabwe governor John Mangudya.
He speaks after weeks of speculation, including dramatic tales of battles with Finance Minister Mthuli Ncube over policy. His biggest war, as with all government policy now, is that whatever measures he makes, he will have to work overtime to convince an increasingly sceptical public.
Confidence in Mangudya, and in the government’s economic management, was already low, and it has suffered even further damage over recent months. Beyond any technical moves he may make, confidence will be Mangudya’s biggest test.
Not since the Gideon Gono years, where needless suspense was deliberately built around such statements, has a monetary policy been this eagerly awaited.
For Mangudya, there is a lot on his plate.
Finance Minister Mthuli Ncube has set a target of 12 months for reforms leading to the introduction of a local currency. He has dismissed other options, such as adopting the South African rand, an option that he sees as a cop-out, and entrenching the US dollar, which has made Zimbabwe expensive and contributed to the decimation of industries.
In October, he took the first step by separating foreign currency accounts from local RTGS balances, a first admission that the two were not at par. This has brought in some US dollar deposits. Banks held US$84.6 million at the close of November, up from US$61.5 million at the end of September. This week, officials reported deposits at US$600 million, although this was reportedly inflated by once-off transactions.
After separating accounts, RBZ then began a process to allow banks to trade foreign currency among themselves, a further step towards the goal of freeing the exchange rate.
The markets may also be keen for hints on the implementation of the proposed new monetary policy committee.
Floating the rate
The 150% fuel price hike on January 12 was one of many measures proposed by businesses to end “distortions” in pricing. It was taken as an admission that the 1:1 peg was not sustainable. However, the impact caused major riots that saw several killed in a security crackdown.
Floating the rate is but another step on the gradual currency reform path. Both Mangudya and Ncube have insisted that conditions are not yet right for the re-introduction of a local currency.
Devaluing the bond note is not just a monetary issue, but will have to be backed by legal moves as well, since the note was introduced by the Statutory Instrument 133 of 2016 and a subsequent amendment of the RBZ Act in 2017.
The move would also have a legal impact on loans borrowed at the 1:1 rate, and on already raging prices. There will also be questions on the impact on accounting practices should this happen.
On Tuesday, ahead of the policy statements, an RBZ official was quoted as saying that a decision to adjust the exchange rate from the 1:1 peg came after “submissions by the business community, company officials and individuals about how to formalize foreign-exchange trading in Zimbabwe. The government supports the move because it accepts the official one-for-one peg to the dollar isn’t working.”
What the market will be looking to see is not what “isn’t working”, but what will work.
The RTGS fix
While bond notes have been the punching bag for critics, they are in fact only 3% of money supply. The US$600 million in bank deposits touted by officials is also dwarfed by the pile of RTGS balances, which stand at over $11 billion.
Ncube has worked to chip away at this pile by increasing transaction taxes, and putting a stop to the issuance of Treasury Bills and the bank overdraft. In simple terms, he stopped printing money. Some analysts, including leading brokers Imara, have suggested that the RTGS deposits could stabilise, and even firm, against the U.S dollar, as long as the government keeps a tight leash on money supply.
Now RBZ will be expected to come up with further measures detailing what happens next on money supply.
The central bank re-introduced statutory reserves at 5% last October, expected to work in tandem with a 7% savings bond, in a bid to mop up excess liquidity. The savings bond, launched in August 2017, had raised some $1.5 billion by October last year.
The collapse of gold deliveries since October, and displayed by RioZim’s suspension of production twice since October, shows the pressure that central bank is under to find an alternative to the retention scheme.
Under that policy, RBZ keeps a portion of the earnings of exporters – 45% of earnings from gold miners – and pays the rest in local RTGS. This has hurt many exporters, and the CZI expects industrial capacity utilisation to fall this year. Various exporters, including platinum and chrome miners and tobacco producers, currently operate under different forex surrender arrangements that analysts say are undermining output.
Debt repayment plan
Ncube has promised to clear nearly US$2 billion arrears with the World Bank and African Development Bank within the next year. Speaking in October last year, Ncube said Zimbabwe would enlist the support of unnamed G7 member states. However, this was before the government’s brutal crackdown of the January protests, which drew international condemnation. Following the security crackdown, the British government, which had warmed up to President Emmerson Mnangagwa’s administration, appeared to reconsider its position.
Mangudya is expected to give an update on the arrears clearance programme, which is vital for Zimbabwe’s economic prospects and its ability to attract fresh international capital.