Prof Mthuli Ncube Path to Prosperity
As we work to put Zimbabwe’s economy back on its feet, recovery is the word.
The Zimbabwean financial situation, its industry, its businesses, have all been in a state of stagnation for far too long. Recent moves have been jolting to some, but this jump-start treatment is precisely what is needed for this patient to recover, to put this stagnation behind us.
Therefore, last week’s moves should be seen in this light.
The Monetary Policy Statement (MPS), which reverberated around the world, seeks to remove the various distortions which had been preventing efficient functioning of the foreign exchange market, with dangerous consequent distortions on the rest of the economy.
In any basic economy, exchange rates must be formalised and transparent. The people of Zimbabwe deserve to know how much their savings are worth; how much their pensions are worth; and when and how they can transfer and exchange currency.
The introduction of the RTGS dollar will go a long way to help remove the multiple pricing system which had become prevalent in the economy. Having goods and services being priced in bond, RTGS and USD is inefficient, confusing, and is not a long-term answer to our conundrum. The previous situation had led to an unregulated and out of control black market.
This illegal alternative market was leading to runaway exchange rate premiums of as high as US$1:4 and even higher in some cases, which in turn pushed up prices beyond the reach of the majority. This situation was unsustainable. We have a duty to the people of Zimbabwe. We must commit to provide price stability and we must continue to keep inflation under control.
As a result of the unregulated black market trading, year-on-year inflation had soared to 57 percent by January 2019, thereby undermining overall confidence in the economy. We had to step in. As I noted in last week’s essay “Taking the air out of inflation”, responsible economic measures have brought month-on-month inflation under control.
The new MPS now sets a robust market-based framework for determination of the exchange rate, that way facilitating financial sector stability, containing of inflationary pressures and building of confidence. And confidence is good for business. Confidence brings in investors, and investors bring in jobs!
The new policy finally liberalises the country’s foreign currency market, and discards the fixed 1:1 exchange rate peg between the US$ and the bond note, which was at the centre of various foreign exchange price distortions. This was not an easy decision to make, but the market demanded stability. But the 1:1 exchange rate was prejudicing exporters and subsidising importers. It was fuelling distortions in the economy and hurting export competitiveness.
The new policy specifically introduces the RTGS dollar, which includes electronic balances in banks and mobile platforms, bond notes and coins. The RTGS dollar, therefore, becomes a new reference for the purposes of pricing of goods and services and accounting; a benchmark for all.
Crucially for all, under the same arrangement, the FCA Nostro accounts introduced in October 2018 are ring-fenced and secured. So how does it all work? In order to facilitate trading on a willing buyer, willing seller basis, the policy established an Inter-Bank Foreign Currency Market, which comprises banks and bureaux de change, providing a broad-based formal platform for efficient foreign currency trading within the economy.
It sounds complicated, but it is rather simple. Zimbabwe will have a regulated, transparent, shared platform; a foreign currency market. We have made a good start. Implementation of the new MPs is already underway, giving rise to a new reference exchange rate of US$1:2,5 RTGS dollars. This implies the maintenance of prevailing prices, but maintains the scope for price reductions, especially as prices were previously calculated at the alternative market exchange rates of around US$1:4.
As we move forward, crucially, the RBZ will continue to strengthen the above arrangement by focusing on containing money supply growth, which also supports the fiscal measures contained in the 2019 Budget on macro-fiscal stabilisation, including inflation containment.
In conclusion, this is about allowing the market to work for all.
This is about liberalisation and transparency. This is about allowing the recovery to take place and enabling industry to thrive. Since the decision, we have seen relative stability prevailing in the alternative exchange rate market. With the introduction of the free market exchange of forex, the parallel market premiums are expected to shrink significantly.
What does this mean for the average Zimbabwean?
First, stability in the economy. Second, this development is expected to translate into availability of foreign currency, and its efficient allocation to support productive sectors. And finally, with stability and clarity for businesses and industry, combined with responsible economic and fiscal discipline from Government; investors will return. And with investors, comes jobs and opportunities.
The road to recovery is not a straight path. There are sharp turns, bridges, and obstacles on the way. But it is these big decisions which will help put Zimbabwe’s economy firmly back on its feet.
The writer is the Minister of Finance and Economic Development.
He writes weekly for The Herald on Thursday