Unpacking the monetary policy

THE long-awaited monetary policy that was presented by Reserve Bank of Zimbabwe Governor Dr John Mangudya last week was received with mixed emotions.

Obviously, many people were left with unanswered questions concerning some of the pronouncements that were made. A monetary policy is a process by which the monetary authority of a country, typically the central bank controls either the cost of very short-term borrowing, often targeting an inflation rate to ensure price stability and general trust in the currency. I will try to unpack some of the pronouncements so that people can understand the implications or rather what they mean.

The policy highlighted inter-banking of foreign exchange RTGS balances and bond notes with the USD and other currencies on a willing buyer-willing seller basis through the banks and bureaux de change — offices that facilitate foreign currency exchange legally with immediate effect.

Willing buyer and willing seller means the market forces of demand and supply will take precedence and determine the rate of exchange on a daily basis. This suggests that the exchange rate is no longer pegged at 1:1 as before but is now operating at a managed floating exchange rate.

A managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries’ exchange rates by buying and selling currencies to maintain a certain range. The other aspect is around denominating existing RTGS balances, bond notes and coins in circulation as RTGS dollars in order to establish an exchange rate between the current monetary balances and foreign currency. In short the RTGS dollars thus become part of the multi-currency system in Zimbabwe.

The legal instrument to give effect to this has been prepared. This means all the bond notes and coins in circulation are now part and parcel of what is known as RTGS dollars. This also includes the existing RTGS balances that most Zimbabweans have been relying on for transactional purposes.

In his own words Dr Mangudya said “the bond note fits well and is part of the RTGS dollars. The RTGS dollars shall be used by all entities (including Government) and individuals in Zimbabwe for the purposes of pricing of goods and services, record debts, accounting and settlement of domestic transactions.”

This means that all salaries and incentives will be denoted in RTGS dollars. Then one would ask, “what about those who had or intend to take loans?” All loans that are record debts shall too be denoted in RTGS dollars.

The RTGS dollars comes about to try and solve the three-tier pricing system that had now become evident in Zimbabwe, where goods or services had prices in bond, prices in RTGS (EcoCash and swipe) and the USD price with some even having a rand price. In this regard, prices should remain at their current levels and or start to decline in sympathy with the stability in the exchange rate given that the current monetary balances have not been changed.

Dr Mangudya said the bank has arranged sufficient lines of credit to enable it to maintain adequate foreign currency to underpin the foreign exchange market. This is essential to restore the purchasing power of RTGS balances through safeguarding price stability emanating from the pass-through effects of exchange rate movements. Restoring the purchasing power of the RTGS balances is of importance since most of the transactions are done using RTGS and most salaries are delivered in the same form.

Dr Mangudya also announced that the foreign currency from the inter-bank market shall be utilised for current bonafide foreign payment invoices except for education fees. In simple terms the foreign currency from inter-banking that is banking of banks among each other will be used to pay foreign debts excluding education fees.

However, banks shall report activities of the inter-bank foreign currency market to the bank that shall closely monitor the foreign currency trades on a daily basis using the form and format stipulated by the Bank.

This is done to monitor especially those depositing or withdrawing large funds and addressing the question of source funds comes into play. According to the policy, in order to allow exporters to benefit from the inter-bank foreign currency market and to promote uninterrupted supply of forex in the economy, the export retention thresholds were introduced for different sectors.

This is a good thing because exporters were suffering from the previous rate 1:1.There is a casual effect that will occur as exporters can export more now with the introduction of the thresholds, this means that there will be inflow of foreign currency that can help stabilise the demand of it in the domestic market.

Similarly, in order to enhance liquidity within the foreign currency market, exporters shall be entitled to utilise their retained export receipts within 30 days, after which the unutilised export receipts will be offloaded into the market at the prevailing market exchange rate at that given date.

The policy also touched on that given the successful completion of the separation of RTGS, FCAs and Nostro FCAs, the RBZ has put in place a local Nostro FCAs settlement platform to allow for domestic inter-bank settlement of Nostro FCA transfers. This means that one can now withdraw from their local Nostro FCA to get foreign currency at the given rate on that particular day.

The implementation of

International Financial Reporting Standard (IFRS) 9 represents a significant milestone in financial stability enhancement due to the forwardlooking nature of provisions set under the new standard. IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

In order to strengthen the stability and resilience of the financial system, the Bank is putting in place a macro-prudential policy framework which will be operational by 30 June 2019. Overall the measures highlighted in the statement are expected to improve the competitiveness of the economy by appropriately rewarding exporters while at the same time reducing price distortions and arbitrage within the domestic market.

RBZ also committed itself to reduce inflation within growth enhancing levels, while minimising the adverse effects of a tight monetary framework in order to enhance production and productivity in the country.

One of the contentious issues among people was dollarisation. Some thought the country needed to dollarise.

Looking at countries that have fully dollarised before such as Ecuador and El Salvador in Latin America, the move comes with its own advantages and disadvantages. Dollarisation that is, the use of foreign currencies as a medium of exchange, store of value, or unit of account is a notable feature of financial development under macroeconomically fragile conditions.

One of the many disadvantages of taking the dollarisation route is that it reduces the cental bank authorities’ capacity to use monetary policy and makes it harder to use the central bank’s lender-of-last resort function to stabilise the domestic banking system. In simple terms it cripples the central bank as it cannot play its crucial part of being the “bank to other banks”.

On the other hand, dollarisation may also have some merit in very specific circumstances. In economies with high and volatile inflation, allowing foreign currency deposits may encourage residents to transact through the banking system rather than deposit money abroad or hold their savings in non-monetary assets. The use of a foreign currency can also bring credibility to a country’s disinflation efforts, notably in situations of very high inflation.

Countries that have experienced episodes of high inflation or hyperinflation have often used the exchange rate as a nominal anchor and have managed to bring inflation down through exchange rate-based stabilisation programmes. For these countries, dollarisation is a way of benefiting from the long track record of the monetary and fiscal authorities of advanced economies and the credibility that is associated with their currencies.

In highly dollarised economies, therefore, the debate about reforms frequently centres on whether these economies should fully dollarise, fully dedollarise, or maintain the status quo.

Agatha Rufaro Changau is an economist with a local university. She can be contacted by email on agatharufaro@gmail.com