A critique of Dr Mangudya’s policy
THE recently announced mid-term monetary policy statement announced on Thursday was couched around confidence and trust.
Ostensibly so because under dollarisation, the traditional monetary policy instruments such as Open Market Operations (OMO), interest rate and exchange rate policies are less effective to influence the direction of the economy.
This is why the monetary policy measures since dollarisation have been largely unconventional.
The bond notes concept is a notable policy intervention of its own kind in the history of banking and finance.
The success of these policies largely depends on the confidence levels in the economy, which are currently at their historical lows.
There is therefore need to renew the contract of trust between the policymakers and other economic agents.
Closing the confidence gap largely requires policymakers to walk the talk by upholding the trust required in economic rebuilding, hence the theme of the mid-term monetary policy statement.
Consistent with the monetary policy tenets of credibility and time consistency, the governor Dr John Mangudya re-affirmed Government’s position on bond notes.
As previously communicated, this currency option is going to be introduced in October this year.
Whether the bond notes will be able to sustainably boost the exports and liquefy the economy largely depends on the confidence levels of the transacting public.
The general fear is that the Government will print more than the $200million Afreximbank facility backing these bond notes.
Their reaction is informed by Government’s former tendencies of printing money, which ultimately fed hyperinflation.
That is why an independent board has become necessary to superintend the issuance of bond notes.
My take is that this board should be made up of credible and trusted members of society who are capable of instilling confidence.
So far, US$56million has accrued to producers — farmers and miners — through the export incentive scheme that was recently introduced by the RBZ.
Payments through the scheme are expected to top US$75 million by the end of the year.
So, in essence, the total amount of bond notes that will be injected into the economy in 2016 will be pegged at US$75 million.
Hypothetically, the market will have the ability to fully use the US$200 million facility once exports rise to US$6 billion.
If the average export levels of US$3,6 billion per annum achieved between 2010 and 2015 are maintained, it takes less than a year to exhaust the bond note facility.
In this regard, one would have expected the bonus scheme to be based on incremental exports for the US$6 billion export ceiling supported by the bond notes to be economically sensible.
It is my view that in its current state, the bonus scheme cannot sustainably boost exports to its weak link with performance.
However, the bond notes will help arrest the continued leakage of the US dollar from the official system.
The idea of localising a portion of the currency in circulation is quite noble in the current economic environment.
There is need to ensure that foreign currency is reserved for critical foreign payments in order to eliminate a payment gridlock that began to emerge in the first half of the year.
It needs to be appreciated that bond notes will only make up 3 percent the country’s total deposits of US$6 billion as at June 30, 2016.
This, coupled with the fact that notes will be introduced in small denominations of $2 and $5, might increase their appeal to the transacting public.
However, the issue of trust and walking the talk on the part of Government need not be over emphasised.
What would be key and more effective in managing the country’s liquidity position is the promotion of plastic money.
It is quite pleasing to note the remarkable increase in the use of electronic money from US$4,1 billion in January 2016 to US$5,5billion in July.
The removal of duty on point of sale machines which was announced by Treasury will definitely support the usage of electronic money.
However, one would have expected RBZ to push for infrastructure sharing as a way of improving the efficiency of electronic payment systems, mainly Point Of Sale (POS) equipment.
If banks pool their resources together, they will be able to invest in efficient equipment, which supports electronic money.
But what will support electronic money going forward is the financial inclusion strategy that was launched in May 2016, which aims to improve access to formal financial services from 30 percent in 2014 to 90 percent by 2020.
The strategy emphasises the need to bridge the gap between high-tech and low-tech financial literacy in view of the technological tsunami that has taken the world by storm.
This strategy largely targets the unbanked segments of the market such as youths, women and small to medium enterprises (SMEs).
Again, the success of this strategy borders on the confidence in the financial services sector.
Banks are however, weathering the economic headwinds the country is currently facing.
Despite the tight financial conditions obtaining in the first half of the year, banks managed to post total profits of $67,8 million and are thus well on course to achieve a full year net profit of US$127,5 million.
Given the compliance with minimum capital requirements and prudential liquidity ratios by all banks — with total core capital of $1,04billion as at June 30 2015 compared to $982,5 million last and prudential liquidity ratios at 52,5 percent against a minimum requirement of 30 percent — the banking sector is generally sound.
Such a situation is necessary in a market where the interbank market has remained inactive.
What is important going forward is to ensure that non performing loans (NPLs) are kept low.
RBZ is planning to reduce NPLs in the market to below 5 percent by December 2016.
One can only commend the banks for achieving their June target.
At 10,05 percent, the NPL ratio is an improvement from a peak of 20,45 percent as at September 30, 2014.
It also means that the Zimbabwe Asset Management Company (ZAMCO) has been very successful.
Low NPLs inevitably drive credit creation, which in itself is also a key driver to economic growth.
A look at the loan to deposit ratio of 63,11 percent; which has however declined from 68,86 percent, shows that there is still an appetite to lend.
Deposits remain short term and transient, which is not ideal for longterm credit creation.
By mid-year, demand deposits made up 50,8 percent of the total deposits of US$5,9 billion whilst time deposits stood at 22,3 percent.
The envisaged increased use of electronic money is expected to stabilise the demand for physical cash balances, leading to a stable deposit base — an important ingredient of stimulating growth.
But the banking sector is likely to be made stronger by the amended Banking Act which was gazetted on May 13, 2016.
The new regulatory framework is expected to promote consumer protection, enhance corporate governance and risk management within banking institutions, as well as facilitate speedy resolution of problem banks through enhanced authority of the Reserve Bank.
RBZ recognises the importance of the role played by the banking sector in deployment of investible resources for economic growth.
It is also alive to the need to re-balance the economy to increased production and low consumption levels.
The re-introduction of auction system for trade of Treasury bills is commendable as it fosters transparency as opposed the current system of private placements.
One would have expected the governor to talk about the modalities of this change-over as this is within his purview.
Given the rejection of the public sector rationalisation initiatives, there is need to understand how Government will be able to effectively re-balance the economy towards increased production and reduced consumption given that only 3 percent of the revenue collected in the first half of the year was devoted to developmental projects.
The progress on re-engagement with international finance institutions under the Lima Agreement has not been clearly laid out, meaning that the deal might be far from being concluded.
This means the country’s financial challenges are far from being solved.
The increasing dependence on debt to support bond notes and the budget deficit is also not healthy. The economy is therefore on an unsustainable growth path.
The developments in the global economy have not helped our situation either.
The global economy is expected to grow at a slower pace of 3,1 percent and the commodities prices are projected to remain depressed despite modest recovery.
This, coupled with the strengthening US dollar which makes our exports less competitive, will dim growth prospects going forward.
As rightfully pointed out by the Governor, there is need to institute serious economic reforms in Zimbabwe.
The country can only grow by transforming from a consumptive to a productive economy supported by exports.
Persistence Gwanyanya is an economist and banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity. For feedback you can email percygwa@gmail.com or WhatsApp +263 773 030 691.