Reserve Bank of Zimbabwe governor John Mangudya last week announced his Monetary Policy Statement while the country was mourning the death of former President Robert Mugabe.
The policy statement came at a time the economy is facing inflationary pressures emanating from a litany of factors such as the lagged effects of monetisation of past fiscal deficits, market correction, spiralling parallel exchange rate premiums and speculative pricing.
Premiums on the exchange rate on bank notes and electronic money have been widening reflecting on increased demand for the notes. The apex bank said it would drip-feed new notes into the economy to ease cash shortages on the market.
This development also comes at a time when reports show that crispy new notes are finding their way onto the parallel market. The central bank denies these claims. The current shortage of physical cash has led to a supply and demand disequilibrium, and arbitrage opportunities for differential pricing models, depending on the mode of payment.
In February this year, the central bank formalised the trading of foreign currency by introducing the inter-bank foreign exchange market and licencing of bureaux de change. Back then trades where managed and there was a huge discrepancy between the parallel market and the formal sector.
RBZ governor John Mangudya now sees inflation softening in the short to medium term mainly due to the discontinuation of Central Bank financing of Government deficits to curtail money supply growth; high interest rates which will curtail speculative borrowing to buy foreign exchange on the parallel market and a flexible exchange rate will assist in absorbing external shocks and ensuring that the external position is sustainable.
While these measures are key in containing inflation, we contend that Zimbabwe still has to address its external sector as well as stimulate domestic production. The latest figures from the RBZ show that South Africa and Singapore are still the country’s major sources of imports. Imports from South Africa reflect on the state of the country’s manufacturing sector while fuel imports from the south east Asian country contribute the bulk of imports.
Currently most companies are facing bottlenecks in buying foreign currency for their raw materials and their balance sheets have weakened following the introduction of the mono-currency regime. Early this year, the central bank committed to take over legacy debts resulting from the monetary reforms. The bank is yet to settle these debts and companies are already feeling the heat.
It is our view that the country’s monetary policy statement is not being effectively being complemented by the fiscal side. As the local currency weakens, inflation soars, public spending is also gradually rising. Civil servants are demanding higher salaries and with no budgetary support the central bank will be forced to inject more liquidity into the market, a decision which is inflationary. The onset of the summer cropping season and a push for more support on the Command Agriculture programme will also result in sharp spike in money growth.
It is our view that under the current circumstances, the central bank’s tools to manage inflation will have a limited effect.