RBZ part of Uhuru story
ALL roads lead to Bulawayo tomorrow for an historic 42nd independence celebration. The event is for the first time in the history of Zimbabwe being held in Bulawayo after the Second Republic shifted it from Harare, which had become like its traditional venue. As part of the celebration and contribution to national development through currency and prices stability among other numerous interventions, The Sunday Mail (SM) Business spoke to the Reserve Bank of Zimbabwe Governor Dr John Mangudya (JM) to hear his thoughts on these and other critical matters. Dr Mangudya strongly believes that a conservative monetary policy stance is critical in managing exchange rate and inflation expectations to achieve price and currency stability. This, Dr Mangudya said, requires the apex bank to use its monetary policy tools that include the management of interest rates, exchange rate, money supply and enhancing the use of the local currency in the national economy to boost local production and productivity. The following are some excerpts of the conversation.
SM: What is the Reserve Bank of Zimbabwe
doing to ensure currency stability? JM:
Following the introduction of the local currency in March 2019, and subsequent adoption of the use of free funds for local transactions, the bank has implemented various measures to stabilise the local currency and ensure price stability. The major milestone was the introduction of the foreign exchange auction system on 23 June 2020 as a market price discovery mechanism to enhance transparency, predictability and efficiency in foreign currency utilization. The foreign exchange auction system has served the country very well as a dependable and inclusive source of foreign currency to the productive sectors of the economy. Since its adoption, the auction system has dispensed US$3,0 billion to bonafide foreign payments transactions. Of this amount, about 70 percent has gone towards importation of raw materials, retooling and purchase of plant and machinery. The SMEs and individuals have also been catered for through the auction system for SMEs and the various bureaux de change across the country, respectively. The Bank is pleased with the, economic fundamentals that are currently in place to support a stable exchange rate. For instance, the country generated more than U$$9.7 billion foreign currency in 2021 against an import bill of about US$7 billion. This shows that the country is able to stabilise the domestic currency in the outlook period through the various monetary policy instruments at the bank’s disposal and management of liquidity in the economy. Commendably the exchange rate has been largely stable during the first quarter of 2022. What we need to work on is to continue enhancing confidence in the economy to deal with the portion of the exchange rate
premium attributable to behavioural traits that include rent seeking behaviour and hate financial speeches targeting at undermining the use of the local currency and causing despondency. In the recent weeks, the bank has also liberalised the foreign exchange market to allow the trading of foreign currency on a willing-buyer willing-seller basis through the banking system. This is essential to allow for the continuous discovery of the market price for foreign currency.
SM: Please explain inflation and year-end
assumptions
JM:
The country experienced significant inflationary pressures associated with currency reforms and fiscal induced money supply growth from the fourth quarter of 2019 to July 2020. Since August 2020, concerted efforts have been made to reduce inflation to optimal levels supportive of sustainable growth. As such, annual inflation which peaked at 837.5 percent in July 2020 declined to 72.7 percent in March 2022. Monthly inflation has declined from 35.5 percent in July 2020 to an average of around 6 percent in the first quarter of 2022.
The sustained disinflation path was achieved mainly due to concerted and consistent reserve monetary targeting framework, which the bank introduced mid-2020 to anchor exchange rate and inflation expectations (one of the major inflation drivers in the country) and fiscal consolidation. In addition, the foreign auction exchange system has resulted in stabilisation of the exchange rate and optimal allocation of foreign exchange to the productive sectors of the economy.
SM: What is the impact of Russia/Ukraine
conflict on inflation?
JM:
Whilst domestic inflation has remained firmly anchored, the geo-political disturbances from the Russia-Ukraine conflict, have resulted in increases in international prices of crude oil, wheat, sunflower oil, fertilisers and other food items, that have a negative spill-over effect on the domestic inflation which is now expected to end the year at between 50 percent and 70 percent and to decline to between 10 percent and 20 percent by end-December 2023.
SM: What support has the bank been rendering to the mining sector
JM:
The mining sector accounts for about 12 percent of the country’s GDP, with a potential to generate $12 billion by 2023. Total mineral exports rose from US$3,65 billion in 2020 to US$5,09 billion in 2021, accounting for more than three quarters of the country’s total exports. Zimbabwe is endowed with a diversified mineral base consisting of about 40 mineral products headlined by gold, PGMs, diamonds, nickel, coal, iron ore among others. The mining sector is therefore critical to anchor economic development under the National Development Strategy 1, 2021 to 2025. Cognisant of the importance of the mining sector in the economy, the bank continues to find ways to support the sector. In addition to the direct participation in the marketing of gold through its subsidiary Fidelity Gold Refinery (FGR), the bank plays a critical role in the facilitation of mineral exports and imports of essential imports. The bank through FGR continues to come up with innovative financing arrangements to equip the small-scale gold producers in the country. Small scale players account for 60 percent of the total gold deliveries to FPR in 2021. The bank also continues to play a significant role in promoting the foreign direct investment as well as arrangement of offshore credit facilities to the mining sector in order to fully exploit the country’s mineral potential.
SM: What about support to the productive
sector?
JM:
Regarding support for the productive sectors of the economy, the bank introduced a Medium-term Bank Accommodation (MBA) facility in November 2019, largely focused
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on supporting agricultural production. The facility was also extended to micro, small and medium enterprises (MSMEs). A total of $7,5 billion has been disbursed since its inception. In addition, about $545,1 million has been drawn down under the MSMEs facility mainly for capital expenditure and working capital purposes. As a result of robust support to the productive sectors, capacity utilisation has been on an increase with manufacturing capacity utilisation reaching around 65 percent in 2021. The facility has also assisted firms to expand the local production of goods which now account for over 75 percent of retail goods.
SM: Also please highlight support to the
agriculture sector?
JM:
Agriculture is a very important sector of the Zimbabwe’s economy, contributing about 14 percent of GDP in 2021, 20 percent to exports and 20 percent of formal employment.
Agriculture exports are dominated by tobacco, sugar, cotton and horticulture. Importantly, more than 50 percent of agricultural produce is used by the manufacturing sector as raw materials. The country’s economic performance is therefore intricately linked to the performance of the agricultural sectors. Agriculture sector is critical to ensure food security in the country.
Prior to 2018 the country was importing wheat and soya bean oil amounting to US$10 and US$20 million monthly, respectively, taking a disproportionate share of the scarce foreign currency.
As such, the bank has been playing its part to increase agriculture production and productivity through extending the Medium-term Bank Accommodation (MBA) term facility to support wheat production, tobacco and other strategic crops. As a result of the targeted support, wheat production increased from 61 thousand tonnes in 2016 to 337 tonnes in 2021.
SM: The horticulture sector has been very vibrant. We want to know what is being done to support it?
JM:
The country has a great horticulture sector potential. In this regard, the bank is putting in place a horticulture development facility, which will allow the banks to lend to the sector.
This will go a long way in boosting horticultural exports. In addition, there are some traditional central bank activities which are supporting growth of the agriculture sector which include:
◆ Use of foreign currency auction system to enable farmers to access foreign currency to procure machinery and other requisite inputs;
◆ Facilitating issuance of financial instruments to support agriculture including agro-bills.
◆Financial inclusion strategy which includes opening low-cost bank accounts for small scale farmers will improve access to financial services and capture a large unbanked section of the farming community;
◆ Enhance the coverage of the credit registry inputs in order to enhance the credit profiling of farmers as part of measures to shorten loan approval times for farmers; ◆ Introduction of the collateral registry which will improve the ease of access to finance by farmers from financial institutions and
◆ Approval of external lines of credits for farmers as part of measures to improve access to external finance by the agriculture sector players.