Monetary Policy sets tone for economic recovery
Gilbert Muponda Correspondent
The Reserve Bank of Zimbabwe released the first Monetary Police statement of the year last week seeking to give the economy direction and achieve competitiveness having identified various factors which are hindering Economic growth. “The major causes of uncompetitiveness of local products are the higher costs of production emanating from high mark-ups to sustain high overheads epitomised by high utility tariffs, finance charges and wages and salaries which are higher than those obtaining in neighbouring countries and beyond. In addition the continued appreciation of the US$ against the country’s major trading partners’ currencies has made imports cheaper thereby making local goods uncompetitive.”
The RBZ rightly notes the lack of competitiveness has various angles to it and it will require a national vision and approach to fix the problem and get the economy working again.
There is a clear need for a shared vision between politicians, business and workers for the economy to go back on track.
Politicians need to redouble their efforts to improve the nation’s image as a favourable investment destination.
Current efforts are commendable and require continuous engagement with the international community to unlock lines of credit, Foreign Direct Investment and improve confidence of non-resident Zimbabweans in the Diaspora who form the backbone of cash inflows into the country.
Business leaders need to review their business models and right size their business in view of prevailing economic conditions and adjust salaries and perks to sustainable levels linked to productivity.
Zimbabwean workers, those still fortunate to still have jobs, have long been on the receiving end it is most unfortunate more sacrifices will be required from them for economic turnaround to be achieved.
High salaries in the circumstances will be irresponsible as they are likely to be inflationary and increase costs of production thereby making Zimbabwean products even less competitive against regional and international competition.
According to the RBZ, “Government is addressing this phenomenon by improving the business investment climate to ensure that Zimbabwe is a good investment destination and to promote the ease of doing business in the country.
The Reserve Bank is buttressing these Government initiatives by engaging the Diasporans through various outreach programmes to encourage the Diasporans to invest in their country like what is happening throughout the world.”
The long period of hyper-inflation and arbitrage (kuburner) distorted many people’s appreciation of the US$.
The hyper-inflation period created skewed pricing models that forever altered how many Zimbabweans viewed and valued the US$.
The value of an arbitrage dollar and a dollar earned via normal economic activity is very different.
An arbitrage dollar is very easy to earn and is not linked to effort or productivity but rather to exploiting economic disequilibrium and pricing distortions in the market while a normal dollar is earned via effort, hard work and enterprise.
Given that arbitrage is gone, people need to adjust their appreciation of the US$ and expect normal margins for their products and services.
The general price decline recorded over the last quarter of 2014 should be viewed in positive light as prices are adjusting to their correct and realistic levels.
This has resulted in marginal negative inflation which comes as a relief to the consumers.
The business sector has responded positively with leading firms reducing prices of their products these include Delta, Innscor and most retail chains such as OK,TM etc.
The price discovery and correction phase may take more time to fully play out as industry seeks to remain viable yet competitive against cheaper imports.
The RBZ has taken concrete measures to induce liquidity in the market which should assist banks to start lending again.
A major step is the creation of the Zimbabwe Asset Management Corporation (ZAMCO), an independent asset management company, to resolve the problem of NPLs.
ZAMCO is now operational, with the proper governance structures.
The corporation is modelled like similar asset management companies formed in other countries such as in South Korea (Korea Asset Management Corporation), Nigeria (Asset Management Corporation of Nigeria), Indonesia (Indonesian Bank Restructuring Agency) and Malaysia (Danaharta).
The main objective is to release funds tied up in non-performing loans to allow banks to continue lending to productive sectors.
RBZ published its maiden Financial Stability Report(FSR) within Monetary Policy Statement.
The FSR evaluates key factors and recent developments in the country’s banking and financial sectors, macro-economic conditions and the global economy which affect the health and prospects of the financial system. This is critical as it provides a useful management tool to improve the overall health and strength of the local financial system. Four banks have been noted to be in distress and the RBZ is working with the stakeholders to ensure that by June 30 2015 all banks are in sound and health condition. This complements efforts to revive the Interbank market.
While the RBZ has been pushing for adequate capitalisation of the country’s financial institutions. More direct and urgent efforts are required to capitalise the central bank and rebuild its standing and capacity to act as lender of last resort which can support the financial institutions operation in Zimbabwe.
A key starting point is to clear all the debt that was acquired during the height of the now discredited Quasi Fiscal Activities.
Merely transferring this debt to Central Government may appear the easy option out but it leaves a bad taste in the mouth therefore there is need for more creativity and innovation on how this debt is handled.
A sustainable and credible alternative is to create a Special Purpose Vehicle which will assume this debt and its assets possibly under the Sovereign Wealth Fund.
Obviously this debt was used to acquire or fund production and productive assets and those identifiable assets and beneficiaries should be part of the solution with the SPV empowered to make recoveries and create a revolving fund which can benefit future beneficiaries as part of a Sovereign Wealth Fund.
The idea of just simply transferring this debt to Government without a clear recovery plan is disastrous and should be discouraged.
The debt should be moved from the RBZ but be isolated into a Special Purpose Vehicle which can become a revolving fund and become part of the long term strategy ensuring Government programmes are sustainable and not wasteful.
The MPS mentions various initiatives on engaging and tapping into the Diaspora centred around HomeLink.
This has now been a constant feature of the Monetary Statements and Budget Statements. Given how important this sector has become on the economy it may be a good idea to create a Ministry of Diaspora Affairs.
This will ensure that the sector gets the priority and profile it deserves and the engagement can be formalised to yield maximum benefits.
The Diaspora remittances are approaching 50 percent of total exports, this highlights the significance of this sector and a fully-fledged ministry is obviously required to properly engage this sector to ensure a two-way beneficial relationship since market sentiment indicates some level of casual approach to such an important area of the national economy.
In addition, the RBZ and other regulatory bodies should do more in facilitating and reducing costs of remittances, supporting Diasporans to set up small enterprises in countries of origin, supporting collective development projects initiated or implemented by Diaspora organisations and their members, supporting Diaspora networks and capacity building of diaspora organisations along with creating durable alliances with established development actors.