‘The Reserve Bank is not creating money’

THE Sunday Mail Editor VICTORIA RUZVIDZO (VR) had a no-holds-barred interview with RBZ Governor DR JOHN

MANGUDYA (JM) on the latest developments in the economy, among them suspension of bank lending, and their implications. Read on ...

VR: How do you respond to assertions by some industry lobby groups and commentators that some of the measures put in place recently are harmful to the economy?

JM: Let me start by saying thank you for this interview. In the economy, we have two policies— the fiscal policy, which is the role of the Minister of Finance, and the monetary policy. Those are the two legs that we use in this economy. Now, if you look at what His Excellency, the President, announced in terms of the measures, there are of a fiscal nature and also of a monetary policy nature. I shall dwell more on the monetary policy measures.

In an economy, when inflation is high, you pursue what you call a restrictive monetary policy stance or what you call tight monetary policy. And we have said many times in all our monetary policy statements and MPC communiques, we are pursuing as a central bank a restrictive and tight monetary policy. What is monetary policy? Monetary policy uses tools.

The tools of monetary policy are interest rates, reserve money requirements, exchange rates and statutory reserves. So, we are talking about interest rates and tightening the monetary policy. In a traditional tightening of monetary policy, we use interest rates. So you have noticed that over a period of time we have been increasing our interest rates, from 40 percent bank policy rate, then 50 percent, 60 percent and the latest one is 80 percent. We have been increasing the medium-term policy rate from 25 to 30, and 40 to the current 50 percent.

Now, the whole idea has also been about reducing the growth in money supply as another tool. The money supply that is in the ambit or the purview of the central bank is reserve money, which is M0 that is made up of coins and notes in circulation, banks’ liquidity at the central bank, because banks bank with the Reserve Bank. So their bank position in the Reserve Bank is part of reserve money. So our target as you have noticed has been reduced from 25 percent per quarter to 20 percent, to 15 percent to 10 percent and 5 percent.

The whole idea of reducing that money supply is to ensure that there is no excess money in the market to push inflation or to push the exchange rate, which has the passthrough effects of the exchange rate into the inflation numbers. So we have been doing that. Now, having done all those things, we found out there is another form of money in this economy, which is called broad money. Broad money, which is M3 or M2 depending on what you want, is not increased by the central bank. It is increased by the central bank when M0 goes up, but when M0 is constant then it’s not with the central bank.

Our M0 has been constant for the past six months around $26 billion — $27 billion.

On the willing-buyer, willing-seller interbank market that $27 billion is about US$100 million. And that US$100 million is there in our SDRs account; in fact, we have got more than US$100 million — we have about US$700 million. So what happened is there is this other broad money that is going up which is out of banks lending, commercial banks lending money to the corporates. So we said we need now to also ensure that money does not grow. So that is the money that is causing the havoc in this economy.

How it is causing havoc is that when banks lend money to some corporates, and because of the lack of discipline on the part of those corporates, they then use the money to purchase goods in the economy and sell the products at the parallel exchange rate. By so doing, they are pushing the price upwards and are also manipulating the exchange rate for their financial gain so that by the time they pay back those bank loans, they are not as painful to pay even after factoring the interest rates, because they would have made money from parallel exchange rate in the market. So they are now using the parallel rate for pricing their products so as to depreciate the loan.

So, some corporates that have been excessively borrowing from the banks were abusing these funds for purchasing their commodities that they would now sell using the parallel exchange rates, which they would then push again upwards. After pushing the parallel exchange rate, when they go back to the bank, it becomes easier to pay back their loans. But the one who has really paid back their bank loans is the consumer who has paid on their behalf. Because the corporates cannot afford to pay back the huge sums they would have borrowed. So the person who is being abused here is the consumer who is buying the product which is indexed at $340 (to US$1). So the entity gets $340 for a dollar and the $340 is then what goes to the bank. Maybe the first day when they borrowed it was at $250/US$1 but by the time they are now paying, it is at $340. So who has paid the loans? It is the consumer!

So the policy now to say lets temporarily suspend bank lending to see whether there is this relationship, which we know is there, and also give us a bit of time to investigate those entities and to have coffee and tea with them and to also ask them why they are doing what they were doing, and whether they are in business or they are there to kill the consumer for their selfish reasons.

So, at one time people were complaining to say the Reserve Bank is creating too much money and that is why there is inflation.

So now we are saying let everyone eat what they kill. Can you also use your own sales for now?

So whilst we are still feeling the impact of not borrowing, we are not giving out money ourselves. So it means that when it now happens to the other people, they cry foul, and yet when we were saying ...that the culprit in this economy is the Reserve Bank that is creating money. The Reserve Bank is not creating money.

I also read it in the ZNCC paper saying that this is abnormal, how can you put your reserve money growth at zero; this economy won’t grow and, two, I also read that our Government is the one that has been supplying money to different contractors as a result they also cause…

Two things there: When the President spoke, he said bank lending to Government and private sector and individuals, too.So he spoke about everyone, including the Government. So what I believe we are trying to do is to ensure that we see what is pushing the rate now.

In economics, we call this ceteris paribus, “holding other things constant.”

So let’s temporarily hold money supply in this economy and see what happens if we do it.

And whether that money will still have the power to push the rate?

If the rate continues going up after we have removed the money, it means it has nothing to do with money. Then we know that it is not money that is causing the rate to move.

So we are doing by elimination and start eliminating this thing that is caused by Mangudya.

Maybe it’s Mangudya who is the problem. So let’s remove the problem and don’t give the money to anyone.

So, not only me, even the banks, because otherwise if they were not doing it, we are also trying to help our banks since I am the regulator.

I have seen many people saying you need a statutory instrument: We don’t need to issue statutory instruments when we are using moral suasion, plus, in any case, throughout the whole world, the first tool they use in monetary policy is moral suasion before you even use the MPC, which is basically a sit-down with the banks, and understand each other. Was it done? Yes, we did that. We spoke to the banks and said this is what we are trying to do, do you have a challenge with this? So we all discussed it and the issue that came was very simple: “Governor, how temporary is temporary?” So moral suasion does not need the law, it does not need a statutory instrument because it is part of the central bank’s role.

So we did that and we said banks we are doing this ... because we do not want to be blamed by this country that it is us who are increasing money supply, so let’s hold it and see what is really causing it.

Is it just the delinquent behaviour or is it behavioural issues, or is it just because there is a third force in the market?

So what it means,if we don’t see stability in the exchange rate today… so who is generating this money?

Maybe we are going to look for other sources, to see are there any crypto currencies in the economy which are being created or? Is there someone creating money who is not the central bank or the banks?

Maybe there are other people who are bringing the money, stoking inflation. That is the context in which the measures were done.

And, at the same time, the measures also said ... Government suspended taking money from the market.

Then, secondly, if there are people who would be paid by the Government, it’s a possibility that when they are paid money, they then use it in the parallel market.

It’s a possibility.

It would be short-sightedness on their part that the entity giving them a job called Government

is the one that they are causing to suffer. You cannot bite the hand that is feeding you. Those people who are being given public works by the Government should be the first people to behave because they know that their bread is buttered by the Government.

I have never seen people with short-sightedness like that if they are the ones, as I read in the ZNCC paper.

If they are the ones, my prayer to them is that behave well for the Government is the one that is feeding you. And, therefore, you need to know that when they are feeding you, you also need to behave well otherwise that is undermining the people who are feeding you.

Because you need to be fed again tomorrow. Otherwise, you are stoking inflation through exchange rate manipulation so that the same people who are going to use those roads or dams, how are they going to use them when they have destroyed their livelihoods?

So, if it is through that route, our argument has always been the same. It also means that they would have also overpriced their contracts, because for them to be able to go to the market and purchase dollars at $350/US$1 means in their invoice they never used the interbank rate. Because if you have used interbank rate, auction rate, or the willing-buyer, willing-seller, you cannot stoke the exchange rate, otherwise you make a loss.

So it means you have been stealing from the Government and those are the ones that we should also investigate.

VR: That sounds logical… JM:

And Mangudya is not there in the contracts. So the question is if they are the ones... that is why I have said let’s have a cease-fire for now in terms of lending, then we see if they are the ones, the contractors. Let’s also investigate them to see whether their invoices are correct or whether they are fair, or whether they are pricing using the willing-buyer, willing-seller rate ...

In any case, we also understand that Government is also paying part of those contractors in foreign currency so that the appetite for foreign currency is reduced, because they will be having foreign currency from Government to buy their bitumen, spares, tools and fuel that they require for the roads.

So it means the balance that they get in local currency they should be able to keep it in this country. But, if they want to preserve value by going to sell it, again stoking inflation, then they are the wrong people who are working for us.

What the President has now done is to say since we have noticed that in this economy there is a need to ensure that there is liberalisation of the forex exchange, there is now willing-buyer, willing-seller rate, so the willing seller sells his foreign currency, those with excess foreign currency, and indeed they are selling because we are seeing the numbers.

Not only have we done that, but we have also increased the limit from US$1 000 to US$5 000 per day and US$10 000 per week, starting with individuals. This is being done gradually. The whole idea is to remove the individuals from the auction, for example, so that they now use the willing-buyer, willing-seller, so that they can pay for their school fees, and pay for their tickets without coming to the central bank. And who can afford to buy US$10 000 per week?

So it means the window is now there. So what is our expectation? Going forward, as was said in the statement, the idea is to have a gradual movement from the auction of these small transactions. So all individuals when they want foreign currency to pay their fees they go to the willing-buyer, willing-seller.

This reduces demand on the auction system and you leave the auction for the major corporates.

The next stage is also to ensure that the SMEs also go to the wiling-buyer, willing-seller so that we leave the auction for fewer transactions, so that it becomes a seamless and flawless window to make sure that at least we are balancing the activities in the economy.

VR: But as you are explaining right now, commentators out there are saying the economy is in turmoil?

JM:

It’s not! It’s just because of the power of negativity.

This economy is a sentiment-driven economy. It’s a negative perception-driven economy. So we move not by faith but by sight. And we move this economy in the power of negativity.

What we need in Zimbabwe is a bi-partisan approach. This idea of having a partisan approach to economics does not work.

You see people here are talking about lending without even knowing what we have discussed here. They only see negativity. So, if your life is being driven by being negative, you end up having headaches, high blood pressure and depression. So you need to be positive in life. So my prayer is that, and I have said this many times, I pray for positivity in this economy. I pray for people to come together as one and for people to understand that we are in this together, and even the message from the central bank through this Governor is that we are all interested in making sure that Zimbabweans are happy ...

We have not come here just to destroy people’s value, and I have never done it.

Do you know in my tenure in this bank, I have never taken anyone’s penny? The money is theirs and the money is secure. I have seen too many social media stories saying the Reserve Bank of Zimbabwe is going to take funds in FCA portfolios. Just imagine, there is an individual, an adult, who sends a message through social media to cause despondency and alarm to the people of Zimbabwe. There is no shred of evidence, even before the President said his statement, I saw some social media messages saying Government is going to announce measures to take people’s deposits and exchange them at the interbank.

JM: Not only that, it shows that those people have their own agenda, those are the people whom you listen to. Those are the people who are driving the negativity in the economy. And, unfortunately, our business entities also succumb to such negativity. Then they also end up being negative. I have said many times that our doors here at the Reserve Bank are open. We meet everyone who wants to see us and give us advice or even counsel. We never refuse. I have met ZNCC here, I have met CZI, we have met the Agricultural Rural Development Authority, we meet ministries; we meet different sectors. We meet everyone. You know what? We have no monopoly to knowledge.

And, as a result, we listen. So when people spoke that they don’t want money supply to go up, we listened and we took a decision to stop it.

So people spoke in this country. All organisations, including those that have never spoken, they spoke through social media, saying money supply has gone up in this country, and we listened and we stopped it from growing.

But the same people are the ones that are crying foul. We never said we have banned it. We said we are temporarily stopping, so that at the end of the day we see what happens.

VR: So the question is how long is the word temporary in your vocabulary?

JM

: There are two things: The first one, even in the circular that we sent to the banks that all the pipeline transactions which they believe themselves as banks that they need to be supported, they have sent them to us.

We have said that the pipeline transactions can come to the central bank for us to approve them and they have been coming, so during that temporarily suspension of new lending by banks to their customers, we have also put a provision, an enabling clause in the circular to the banks, since this was moral suasion, so that we do not stop the economy from functioning. We then said we assess on a case-by-case basis.

Secondly, bank facilities for tradeable commodities are exempted from the suspension to allow for orderly marketing of the commodities that include tobacco, cotton, maize, sugar, soya beans, etc. So your question on when are we going to remove the suspension, it will be reviewed next week (this week).

VR: So what have your investigations dug out so far...?

JM : What we have found out is what I have told you, that other corporates were heavily borrowing from the market or from the banks for the purposes of using that money to purchase their products and manipulate the exchange rate, which is called currency attack.

They attack the currency so that it depreciates, then they pay back their loans. In fact, they make a profit from borrowing. Because the adjustment in the exchange rate is higher than the interest the bank will get. This is why the interest rates route was never going to work for these guys.

Because even if you put the rate at 80 percent, the rate will depreciate much faster even if you put it at 100 percent or 150 percent.

As I read from Professor Hanke, who said you need to increase the rate to 166 percent, even if you put at 166 percent, they will send the parallel market rate to much higher than the value of the interest.

By so doing, you continue to chase your tail because they are moving the target. Because their job is to attack the currency.

VR: So, from your perspective, is it mere greed? What could really be causing this?

JM : To be honest with you, I don’t know, but I can only think that it is beyond business, it’s beyond finance. Maybe it’s greed or maybe it’s because of past experiences that we went through as an economy of hyperinflation that whenever they see money, they think of burning. You know this thing called “burning”. Maybe whenever they see money, they think of burning it, which means making arbitrage and profits.

So maybe it’s rent-seeking behaviour. Rent-seeking behaviour, if it becomes endemic or pandemic, it becomes a problem because it’s now a culture, and that culture becomes greediness. Then also maybe its political to cause people to be angry with Government policies for reasons that are outside the central bank’s knowledge.

I saw someone saying that Mangudya should go to Mutambara (his home area) and see what they are going through. Yes, I know what they are going through.

This is why I do these policies to ensure that my relative in Mutambara can also continue to have stability. But this is what others don’t want to see happening.

This is why sometimes when a policy is announced, even if it is good, they start seeing its negative side.

I am not saying all policies are good, they have side effects just like a drug, medicine.

You see it written that don’t take these tablets when driving because you might sleep. Those are side effects. Even this policy on lending, I said many times, it may be painful but it’s a necessary vaccine to the problem that we are facing.

So we know that it might be negative to others who are law-abiding citizens but it might be sorting out the challenges that we have in the economy.

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Dr Mangudya