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Dr Mangudya

Happiness Zengeni The Business Interview
Business Editor Happiness Zengeni (HZ) spoke to Reserve Bank of Zimbabwe governor Dr John Mangudya on the situation with the country’s money supply inclusive of bond notes and treasury bills. The following are excerpts from the interview:

HZ: What is the exact situation with money supply? Care to provide statistics and the current ratio on bond notes to US$ and what the trend has been on deposits as there is argument around the real level of bond notes out there.

JM: The exact situation with money supply in Zimbabwe is that deposits have been increasing over the nine years since the country adopted the multi-currency exchange system. Deposits have grown on a continuous basis at around 10 percent per annum to the current level of US$6,4 billion. The growth is attributable to the growth in exports, contracting of foreign loans, diaspora remittances and issuance of TBs. Bond notes issued to date of $102 million together with bond coins in circulation of $15.3 million account for 1,8 percent of deposits at banks. Using the Kalman filter and other methodologies, the bank estimates that there is around US$900 million of cash in circulation in Zimbabwe. This amount, together with bond notes, is substantially in line with best practice where the ratio of cash in circulation to deposits is around 10-20 percent.

HZ: Are there mechanisms that the RBZ has or is putting in place to deal with the growing parallel market in the economy as the bond/us parity appears to be failing to hold. Fears are that a thriving parallel market will adversely affect importation of critical raw materials thereby fanning inflationary pressures.

JM: As stated in our recent Monetary Policy Statement, the major setback facing our national economy is lack of discipline which is compounded by the general lack of confidence within the economy.

It is lack of discipline and confidence that cause some traders to have multi-tier pricing system on some products, especially essential products such as cooking oil. Put simply, the multi-tier pricing system is being done with bad intention by some traders with the intention to frustrate or discourage consumers to use plastic money with the intention to externalise cash and to trade bond notes in the parallel market for foreign exchange, again with the bad intention to externalise cash. What makes it so obvious that the intention is bad is because the traders doing so are mainly targeting essential products that are even manufactured locally such as cooking oil. Manufacturers of these products obtain foreign exchange from banks at official exchange rates and produce and sale the products to these unscrupulous traders, in good faith, mainly through Real Time Gross Settlement (RTGS) mode of payment ie, manufacturers are not substantially involved in the multi-tier pricing system. Thus, the traders are the ones exploiting the consumers and the entire value system through arbitrage. This reflects greedy on the part of traders and the high appetite to externalise foreign exchange.

The major impact of the malpractices being perpetrated by some traders is not more on inflation but on impoverishing consumers who have low fixed incomes.

Thus, the limiting factor of inflationary pressures within our economy is low disposable income which should compel traders to have moral uprightness in the conduct of their businesses and not to exploit consumers. Some of the major culprits in this sector also need to have discipline of gratitude as they are operating in the Reserved Sectors of the economy.

HZ: What is the RBZ doing to curb this indiscipline.

JM: The Reserve Bank is attending to these malpractices by stepping up the gear to enforce the requirements under the Bank Use Promotion Act [Chapter 24:24] to ensure that traders behave in accordance with best practice and to bank their sales proceeds as is required by law. The Bank is also encouraging banks to fully adhere to the Know-Your-Customer (KYC) principle.

In addition, the Bank is working on measures to legislate the use of point of sale (POS) machines at all outlets, including government departments, and on discouraging the multi-tier pricing system. In order to effectively promote the use of plastic money as we journey towards a cash-lite society, the Bank is working with service providers on modalities to make it cheaper to use plastic money than cash transactions. The permanent solution to dealing with parallel markets is to increase production of goods and services or alternatively to learn to leave within our means. The perpetual current account and fiscal deficits are not sustainable for economic growth. They need to be tamed by improving the investment climate in the country under the ease and cost of doing business reforms and to localise production of goods and services.

HZ: Is there any indication on when the bond notes will expire?

JM: Bond notes would not expire but instead, they will be demonetised at the appropriate time when their productivity and export competitiveness objective has been achieved.

HZ: It appears the cash crisis has worsened over the past months despite the increase in the bond notes in circulation. And in a Herald report recently, you are quoted as saying the disappearance of the US$ was a policy measure. Would you care to comment on this policy and measures the RBZ is taking to ensure there is enough cash at the banks.

The shortage of cash has not worsened. The situation has improved. We have continuously advised that queues for cash at banks occur mainly on Government paydays as government employees convert their virtual earnings into physical cash. This misalignment is the one causing queues at banks as banks and the Reserve Bank would be required to find and or import foreign exchange cash to meet the physical cash demands for government and other sectors’ employees. Government is the biggest employer in the country and its employees’ cash demands are also very high at more than $200 million on aggregate per month.

What we said is that the non availability of high value denominations of US$50 and US$100 bills was designed to mitigate against money laundering and capital flight.

We have resorted to importing smaller denominations of US$10 and US$20 and the use of bond notes and coins for the transacting public. This is over and above our desire to ensure that Zimbabwe becomes a cash-lite society by year-end, from the current ratio of around 60-70 percent to 90 percent of sales transactions. This policy direction is critical in order to minimise mismatches between cash and virtual money and for preserving foreign exchange in nostro accounts for foreign payments.

HZ: What is the actual figure of TBs released to date and are there still plans to establish an open market for them.

JM: The TBs that Government has issued to date are split into four categories, namely, $300 million long-dated TBs held to maturity for capitalization of various Government institutions, $549 million long-dated TBs issued to banks for the acquisition of non-performing loans by the Zimbabwe Asset Management Corporation (ZAMCO), $780 million medium to long term TBs issued under the Reserve Bank Debt Assumption Act for the central bank debt taken over by Government and, lastly short to medium-dated TBs in an amount of $450 million issued to finance the gap between expenditure and revenue collection by Government.

This brings the total TBs in the market spread between short-term to 15 years to $2,1 billion.

Government is still working on the modus operandi to establish an open market for government securities.