Monetary policy statement: Without wheels, the car won’t move

Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, released the January 2017 Monetary Policy Statement (MPS) on February 15 under the theme Stimulating Economic Growth and Bolstering Confidence.

Source: Monetary policy statement: Without wheels, the car won’t move – NewsDay Zimbabwe February 23, 2017

Financial Spotlight: Omen Muza

A month ago, in an article titled Will the MPS address Deep-Seated Challenges? in this column, I suggested that given the widespread pessimism about economic prospects, the MPS would need to be a confidence-boosting one. I also identified some recent successes by the monetary authorities, but hastened to state five key challenges which I thought demanded immediate attention.

Now I will share my views on the policy measures outlined by the monetary policy statement.

Cash shortages

The MPS acknowledges “underlying physical United States dollar cash challenges on the back of the high demand for cash by the banking public”, but does not prescribe new solutions. It, instead, talks about “promoting the use of plastic money resulting in the significant use of same and decline in the demand for physical cash.” The challenge with this, of course, is the limited infrastructure, which makes it difficult for the majority of people, particularly those in remote rural outposts, to transact through this medium. The Reserve Bank should have announced concrete financial sector plans for investment in point-of-sale devices.

Extension of the $200m Aftrades facility

Extension of the $200 million African Export-Import Bank Trade Debt-Backed Securities (Aftrades) facility by a further two years, to expire in February 2019, is a forward-looking measure which improves the market’s overall liquidity profile. RBZ contends that at $100m, it is now well-capitalised and this, combined with the Aftrades facility, has made “the banking sector stronger and safer”. I doubt if millions of Zimbabweans who are struggling to get their money out of banks care about how much capital the RBZ has and whether they even care what Aftrades is.

Interest on savings accounts

The RBZ says it is cognisant of the fact that low interest makes it less attractive to hold savings, resulting in the emergence of a consumption-driven culture.

However, RBZ should realise that consumers will not deposit money in the banks, even if deposit interest rates are increased, when there are uncertainties about getting it back when they want it and whether they can get it in the form in which they deposited it. Of course, people can deposit bond notes, but when they have the real dollar, they would rather take them to NMB [national mattress bank]. RBZ should also address other issues that make it impossible for savings to grow — the uncertainty around bond notes and the cash shortages that make it absurd for anyone holding cash to think about saving it in a bank account.

Domestication of the settlement of local card transactions

Domesticating the settlement of local card transactions on international card switches makes much sense in terms of preserving foreign currency and this has already seen Visa announcing the imminent introduction of national net settlement service, a local settlement solution customised to process, clear, report and settle domestic dollar transactions.

Promotion of efficient circulation of bond notes

RBZ said it was putting in place a redistributable measure that mitigates against skewed concentration of bond notes within the banking sector by limiting the maximum amount of bond notes that each bank should hold at any given point in time in relation to its level and type of transactions. In my view, this is a disguised attempt to ensure that banks hold bond notes according to the sizes of their balance sheets and not according to the value of exports handled through their bank. This means that bigger banks will be forced to hold bigger balances of bond notes as the process of supplanting dollar balances with bond notes holdings.

From initially being an export incentive, which would purportedly not be forced on anyone, bond notes have not only become the dominant transacting mode for cash purposes, but one which banks must now necessarily hold up to predetermined levels on their balances sheets for compliance purposes, whether their customers have exported or not. But if bond note holdings become a function of balances sheet size, will $200m still be enough to go around?

Dollar-bond note parity

In a quest to preserve the parity of the bond note to the dollar, RBZ directed financial institutions to strictly observe the policy to deposit bond notes into the dollar accounts without requesting the banking public to differentiate between bond notes and dollar cash. According to RBZ, this measure will ensure that bond notes continue to trade at parity with the US dollar and to reflect the fact that that bond notes are supported by the $200m offshore facility.

The sooner the authorities realise that the true value of bond notes will ultimately depend less on legislation/coercion and more on the ability of market players to secure foreign currency on the open market for their import requirements.

$70 million nostro stabilisation facility

Intended to clear the backlog of foreign currency on the import priority list, this is a valve to relieve the pressure of demand for foreign currency, which would otherwise be relieved by alternative outlets such as the black market. Important to note is the figure of $120m in physical cash said to be at banks, of which $94m is already in bond notes. This means that when fully utilised, the $200m facility for bond notes should be enough or close to enough to meet all the country’s cash needs. So it’s not far-fetched to posit that when this happens, US dollar cash will almost have disappeared from the system.

Imperative of addressing structural reforms

To his credit, Mangudya is keenly aware that addressing the issue of structural reforms would enhance business confidence and attract both domestic and foreign investment. Accordingly, he correctly notes that structural reforms would lead to a reduction in the proportion of government expenditure to gross domestic product and also to a reduction of government wages and salaries as a proportion of tax revenue.

I wonder if he is aware that as soon as he begins to talk about government expenditure, he is talking about political will to make hard choices, which is at its lowest ebb at a time 2018 elections are perilously edging closer.

However, until the will to address these deep structural issues is mustered, Mangudya’s measures outlined in the MPS may not amount to much than tinkering with decimal places. As one economist recently put it: “Whenever you put monetary measures to structural issues, it doesn’t work. Monetary policy is the engine oil in a car. The car will not move if it does not have fuel or wheels.”

Omen N. Muza edits the MFSB. You can view his LinkedIn profile at or initiate contact on