Hot on the heels of last weeks 2020 budget presentation by Finance Minister Professor Mthuli Ncube the Monetary Policy Committee met and announced a few measures to buttress some of the measures pronounced in the budget statement. The headline of these measures was without a doubt the halving of the policy lending rate of banks.
According to the statement released all members were in attendance at the meeting and all in agreement about the decisions made in the meeting. That’s a bit of a red flag there, sure there must be some debate and deliberation about matters critical to the nation as a whole. Especially given the tendency for the RBZ and the committee itself to make some rash decisions. More on this shortly. The committee expressed its pleasure with Mthuli Ncube’s budget statement.
Reduced the lending rate from 70% to 35%
The committee moved to immediately reduce the policy lending rate from 70% to 35%. This is complimentary of course to Mthuli Ncube’s attempts at expansionary policy in the budget. Industry’s in our ailing economy badly needs access to finance. However, let us not forget who put the lending rate up there and why. At the time the Reserve Bank said they did so to prevent speculative borrowing that they claimed was fuelling the parallel market. So, what has been done to curb those speculative activities? Will the speculators not just start speculating again? Did the speculators ever stop? So the committee has come to undo the rash decision made by the RBZ.
Inflation picture looks positive?
From the questionable to the bizarre the statement from the committee meeting said the inflation picture looks positive on the back of month on month inflation for October coming in at 38.8%. That’s double September’s 17.07%. How that looks positive is a mystery. Year on year inflation sits at 440.1%. How does month on month inflation being as high as it’s ever been since 2009 look positive? They explain the inflation rate away with price adjustments in fuel and electricity. This should be no comfort to anyone because both those items have promised a US dollar-linked pricing system going forward. Without arresting the exchange rate they will continue to impact inflation.
Interbank efficiency to be increased
The statement also carried a message on increasing the efficiency of the interbank foreign currency trading system. They will adopt a real-time market tracking system as offered by Thomson Reuters. This will bring together information in the interbank market in real-time to provide accurate market information. In principle the idea is great’ perhaps a little work could be put into the effectiveness of the interbank market at matching buyers and sellers. The transparency improvements are welcome as they will help in legitimizing the Zimbabwean dollar which for many years had been disguised as a bond note.
Quarterly monetary targets
The reserve bank will use a system of quarterly monetary targets to achieve inflation arresting objectives. As we have stated many times and by the Reserve Banks own admission the increase in money supply is the cause of both the inflation rate and the exchange positions. The 2020 budget made mention of using monetary targeting to control inflation. Monetary targeting is a system through which central banks focus on money supply and manipulate it through (normally) indirect means to achieve the desired exchange and/or inflation rate. A simple example is our current circumstances where the lowering of the lending rate puts more money in the hands of industry due to access to cheaper finance. This simultaneously discourages savers from interest-based instruments and moves the money to equity investment as a better option. The goal for the reserve bank will be control of the broad money supply. In simple terms the greater the money supply the more Zim dollars we have chasing goods and hence inflation. So the use of quarterly monetary targeting will be welcome.
The committee also reiterated the position on repatriation of foreign currency by exporters. A practice has developed, as noted by the Reserve Bank where exporters delay the repatriation of foreign currency to Zimbabwe. Given that the interbank market came with a 30 day use it or lose it rule when it comes to foreign currency held, one would want to delay repatriation to start their 30 days as far down the line as possible. The committee now seeks to punish those who do not adhere to this regulation and retention limits by forcing them to forfeit all foreign currency at the interbank rate.
Aside from the parts in support of the budget which had to be reactionary we once again have a policy that seeks to address symptoms more and more. While immediate action had to be taken to stimulate growth we sincerely hope our monetary policy is not reduced to such piecemeal legislation. Decision making seems to be better under the monetary policy committee, it remains to be seen whether better is good enough.