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Vandudzai Zirebwa Buy Zimbabwe
As I was going through the Monetary Policy Statement issued last week, one thing became increasingly clear that policymakers are caught between the necessity of maintaining credibility, which effectively means the status quo, and the need to increase the range of policy tools to stimulate output and employment, boost competitiveness and exports, increase fiscal space and strengthen the financial system.

In recent times, policy making in Zimbabwe appears to have become convoluted, as the odds are against the fortunes of this economy.

The economy is slowing down, jobs are being lost, revenue finding its way into the fiscus is declining and the banking sector is becoming increasingly vulnerable due to escalating non-performing loans that stood at 16 percent of the total loans at December 31, 2014.

When Zimbabwe adopted the multi-currency system in 2009, it lost the ability to control its monetary policy and create its own liquidity through printing money.

The State no longer has access to seignorage – the profit flowing from the printing of a country’s currency – and the lender of last resort function of the central bank is severely circumscribed, dependent on the provision of funding by the State.

As a result the authorities have been forced to resort to financial gymnastics, using offshore credit lines to support banks, some of which are insolvent rather than just illiquid.

So to create liquidity, especially in the absence of foreign financial support, theoretically Zimbabwe has to boost its exports to produce the stock of money needed in the economy. But since adopting a multiple currency economy, imports have soared while exports have shrunk.

Though the current account deficit narrowed by 14 percent between 2013 and 2014, from $3,9 billion to $3,3 billion, it is still unsustainably high at 25 percent of GDP.

In the absence of the foreign reserves that could be used to finance the deficit, it has been mainly financed by Diaspora remittances suggesting that the country is not benefiting much from the multiple effects of the Diaspora inflows.

Furthermore, the deficit has been financed by a growing private sector debt through offshore credit lines.

This is likely to create a time bomb for the economy, given the stagnation in the economic activity, which will likely impact negatively on the private sector’s ability to repay. This, inevitably, is the prime consequent worry for the country. Going forward, the external position is likely to remain under pressure from a high import bill, as the rebound of exports does not match the steep rise in imports, leaving an anticipated current account deficit of 28,5 percent of Gross Domestic Product (GDP) by the end of 2015. There is a possibility of compression of exports due to the unfolding decline in commodity prices.

Our balance of payments position remains precarious at a time when growth in manufactured exports is slowing while the country has insufficient foreign currency reserves at its disposal to finance the current account deficit.

The country is very much exposed to external shocks due to the fragile global economy and decried heavy reliance on commodities.

Declines in global activity and commodity prices will have inescapable consequences for the country’s export earnings, and hence its output, incomes, and fiscal revenues. Diaspora remittances and investment flows are likely to weaken, with knock-on effects on domestic demand, banking sector liquidity and loan quality, resulting in more difficult credit conditions. Our predicament is further worsened by the reality that Zimbabwe has no capacity to ease the markets quantitatively by printing money due to the fact that we use a multiple currency regime; the ability of the Government to intervene directly to stop the haemorrhaging is very limited, more so considering that our National Budget is not generating surpluses.

RBZ Governor Dr John Mangudya was very articulate on the challenges and he proffered solutions to some of the problems despite minimal scope for the monetary policy. The major highlights of his statement centred on moral suasion, in its narrower sense, for the private sector to operate in a way that works for the good of the economy. Dr Mangudya bemoaned the reluctance by private sector players to round down prices following the introduction of the bond coins and also the maintenance of high charges by banks.

However, the reality of the matter is that, the economy is stuck in an untenable low equilibrium position characterised by low production levels, low wages, and low levels of employment and low investment rates. To unleash new momentum, fresh capital is required. Evidently, the Government is incapacitated to intervene directly hence the emphasis on doing business reform.

More importantly, business confidence has been and remains the major factor constraining significant capital inflows into country in the FDI as well as portfolio flows.

Furthermore, chief among the factors negatively affecting business confidence have been lack of policy clarity and among others, absence of Government decisiveness on the resolution of both the country’s domestic and international debt as well as the continued less than satisfactory record, at least in the eyes of the international community regarding Zimbabwe’s adherence to the widely held virtues of upholding property rights and enforcing commercial contracts transparently.

The Governor alluded to the need of all stakeholders to come together and make sacrifices in one way or another and work hard to address the fundamental challenges of the economy.

Yes indeed, this is critical, but the Government has the primary role of making sure the business environment becomes attractive to new capital. This is what Zimbabwe needs.

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