Monetary policy, a huge leap towards safety

Monetary policy, a huge leap towards safety
Published: 21 February 2019 (230 Views)
The Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, yesterday took a huge positive leap towards healing the ailing economy when he devalued the bond note during his Monetary Policy Statement (MPS), a move that we boldly believe will greatly help the economy by obliterating the troublesome black market.

Mangudya officially floated the bond note from the fallacious 1:1 against the US dollar. The latest move will have far reaching consequences for all sectors of the economy, but we think it will generally have a positive impact because economic activities will be per prescription rather than the previous scenario where things were premised on speculation and hide and seek.

Black market activities were thriving sending the economy in a spin as prices of basic commodities went beyond the reach of many, while other critical economic vehicles such as fuel were in short supply before Mangudya's latest pronouncements.

Unlike his October 2018 MPS which retained rigidity on the exchange rate of the bond note against the greenback, his latest delivery responded to the plight of economic players who have been clamouring for the exchange rate to be liberalised.

Business people, particularly in the manufacturing, agricultural and industrial sectors have been largely dependent on the black market to access forex. The development meant a huge slowdown in production, while in worst-case scenarios some businesses shut down.

Among the other raft of changes he made yesterday, Mangudya introduced an intermarket for forex trade (a statutory instrument backing it up is expected soon), and monitor banks in the first two weeks on a two-hourly basis to ensure that they effectively bury the informal deals that have been hurting the economy.

The central bank says lines of credit have been arranged to stabilise the RTGS dollar currency (the new name of the bond note, coins, and bank balances).

In order to boost the main stakeholders in the economic sector, the manufacturing segment will be given 80% retention in forex, gold miners 55%, and producers of other minerals 50%.

Another credit to the RBZ was avoiding re-dollarisation, arguing it was going to trigger recession. We cannot agree more with the RBZ governor.

It was a shrewd move by Mangudya taking into consideration what happened during the era of Gideon Gono when the country recorded the highest inflation figures ever. The central bank resorted to removing zeros from the national currency after rapid devaluations. But the currency continued on a free fall as it dropped before the government blocked electronic bank transfers.

In order to curb unwanted speculation, the RBZ will denominate the existing Real Time Gross Settlements (RTGS), bond notes and coins in circulation as RTGS dollars in order to establish an exchange rate between the current monetary balances and foreign currency.

"We are using what we call managed floating on a willing buyer willing seller, not the auction system," said Mangudya.

All these attempts we believe are efforts to formalise the economy and make sure the much needed foreign currency is available, and allow businesses to access forex through formal channels.

However, for this to succeed, the support mechanisms the central bank has proposed must be effectively monitored. There might be some seismic shocks in the embryonic stages, but they will be temporary if the support policies are effected.

The other problem that may arise going forward will be the trust deficit among the transacting public, business and the government itself. The authorities, in effecting this, must quickly ensure that people's savings are safe in whichever way possible.

But by and large, the Business Times believes this MPS will bring positive results in the economy provided the central bank religiously follow what it has stated and continues to consult regarding other areas where the MPS does not adequately address.

- businesstimes

Tags: monetary, policy, rbz,
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