Newly-appointed Finance and Economic Development Minister Professor Mthuli Ncube told the world earlier this week, that for Zimbabwe to introduce a local currency, it will have to, among other things, put in place a fully-fledged Monetary Policy Committee, introduce a market-based allocation of foreign currency, as well as allow exporters to keep their receipts in foreign accounts.
We need certain triggers such as the establishment of a full Monetary Policy Committee (MPC), the introduction of a market-based allocation of forex, and making sure that investors, those who are exporting, can have foreign currency accounts and keep their receipts in dollars, said Prof Ncube in an interview aired on Bloomberg.
These are the building blocks for full Monetary Policy, he said.
While Prof Ncube said there was no time frame for the introduction of a local currency, he said there is “need for this to happen sooner rather than later.” The country has already witnessed the vagaries of using the multi-currency system where the US dollar dominates, it’s just not enough for all, as evidence by efforts to ration it.
But is the introduction of an MPC, the answer? Most central banks, the world over, have an MPC constituted with a mandate of setting monetary policy measures that will regulate money supply growth, keep inflation in check, or to achieve the required stability, prices in particular. To give examples from other countries, in the United States, monetary policy decisions are made by the Federal Open Market Committee and in England, they are made by the Bank of England Monetary Policy Committee.
Unlike in Zimbabwe where the final call is that of the Governor, in the US, the monetary policy decision is taken on majority vote by members of the MPC. Adopting an MPC means decisions are made collectively and chances of making mistakes on policy are minimised — many still question the introduction of bond notes.
Further, for a MPC to have any chance of working, it would need to have enough authority to regulate and control Government from spending more than it can raise in taxes. Currently, Government is on its way to spend nearly twice as much as it can raise from taxes with money supply growing more than ten times as fast as the economy is growing.
If the proposed MPC does not have enough power to force Government to balance the Budget, it will not be able to do its job. Prof Ncube’s MPC will have to regulate and control excessive Government spending, something that President Mnangagwa has also acknowledged, telling the Ninth Parliament that fiscal imbalances had driven sustained serious demand for cash and hard currency, a situation which is now threatening the country’s otherwise stable and solid banking sector.
The second trigger that Prof Ncube proposed is the introduction of a market-based foreign currency allocation. Market-based allocation of forex is basically allowing banks to manage their own nostro accounts, which is what we had until 2012 when former Finance Minister Tendai Biti and the RBZ decided to drain them dry.
Removal of retention thresholds allows banks, who know the customers better than the RBZ or anyone, to allocate the scarce foreign currency, thereby improving efficiency.
However, while deregulation of the forex market is a crucial step in improving the allocative efficiency of foreign currency, the scarcity now would dictate that only a few could afford to bid for it. It will also mean Government has to wait in line at the banks and also pay for the forex. Prof Ncube will thus need a balancing act to make sure that Government is able to get forex for strategic requirements such as fuel, medicine among others.
The best solution might as well be what Dr John Mangudya has already implemented by concentrating on earning more foreign currency. Maybe to strengthen this policy, there is need to put safeguards that ensure we spend less on things we could produce ourselves and also to toughen up and forego products that are only meant to satisfy our cravings for imported luxuries at the expense of economic growth and development.