Prior to the release of the delayed monetary policy statement, rumours surfaced that the policy statement was delayed by a rift between the Finance Minister Mthuli Ncube and Reserve Bank Governor John Mangudya. While those may have been dismissed as mere rumors the bizarre headlines on two big national newspapers may have us revisiting them.
The Herald reported on 12 March 2019 that the RTGS dollar will gain value. In their report the Herald quoted the finance minister as saying the new currency would gain value on the back of reforms being put in place. The minister specifically cited the budget surplus and the containment of money supply growth as the forces behind the expected strengthening of the RTGS dollar.
On the same day, Newsday quoted Reserve Bank Governor John Mangudya saying the rate for the RTGS dollar versus the US dollar was expected to find its equilibrium and would be around 3,50 to the dollar. In fact the Reserve Bank has already softly caved to this reality as they have given gold producers the rate of 3.50 for their foreign currency surrender balances according to Tendai Biti as he posed questions to Mangudya.
Policy inconsistency is not new to Zimbabwe but this certainly paints a gloomier picture. The honorable minister does have a record for continuing to beat his drum and reciting the Zimbabwe is open for business mantra. His assertions are based on the containment of factors which have played a big part in Zimbabwe’s currency trouble, money supply growth and government borrowing. A look below at the money supply growth trend for Zimbabwe over the years.
The Reserve Bank Governor seems to be more concerned with the market position on the rate and how the market and not the bank would determine the rate going forward. He stated that the position is expected to be achieved towards the end of March before tobacco marketing season.
There is a point of convergence in these two statements, both mention the effect of inflation. Mangudya thinking proactively reckons wage inflation would be dangerous to the economy. He also raised concern over the reduction in aggregate demand in the economy and the danger posed by stagflation. Stagflation is a term coined for a situation that presents both low economic growth and high inflation. The minister spoke in general terms about arresting inflation in this instance but has linked the exchange rate to inflation in his Progress on policy reforms report.
It’s hard to definitively say where the rate is going but in light of the flaws in the current interbank foreign exchange market one would be inclined to give more credence to the RBZ governors words. The minister of finance rightly notes the contribution of money supply growth and government debt (which fueled money supply growth) to the currency valuation.
The minister however has not considered other motivations behind the exchange rate such as demand for currency. While US dollars are favored for foreign payments their greatest value to Zimbabweans is as a store of value. Zimbabweans have twice lost savings and asset values due to currency valuation. Once bitten, twice shy and the Zimbabwean public have moved towards using foreign currencies as a method of storing value.
While there can be much to say for both sides of the argument the RBZ may have the last say on this one. The parallel market position is already pointing towards a devaluation of the RTGS$. So too does the Old Mutual Implied Rate. That Reserve Bank Governer Mangudya initially answered questions as to the value of the RTGS$ with somewhere between 3 and 4 to the US dollar is telling.