Monetary Policy in Zimbabwe
In mid December, the new Reserve Bank Governor announced a new
monetary policy for Zimbabwe. This was much heralded - the Minister
of Finance had said it was coming in the November budget statement
and then the Governor himself had said that he would be announcing
far-reaching measures. The State controlled media and the bank
itself carefully orchestrated the actual
announcement. Television crews recorded the statement as it was
being made and copies were rushed to the financial community.
It was long - 114 pages, had some poor English in it but in
substance he announced that there would be two major changes to the
way the Bank had done business in the recent past. These were: -
1. He would allow the dual interest rate policy to continue -
allowing the State to borrow at low rates to fund its activities and
budget deficit but requiring the "productive sector" to pay a market
related rate. There would
be an end to Reserve Bank support for illiquid financial
2. He would introduce an auction for foreign exchange and half the
Governments statutory purchases of foreign exchange from exporters
would be directed through this mechanism. He also tightened up the
rules for the use of the other 50 per cent retained by the exporters.
To say that the impact was dramatic is to put it mildly. Interest
rates in the private sector shot up from about 100 per cent per
annum to over 900 per cent and when the auction was opened exchange
rates firmed about 40 per cent. From about 6000 to 1 for the US
dollar to about 3500 to 1 where it was yesterday on the auction.
The banking sector was taken by surprise and the 17 commercial banks
and 20 odd Merchant Banks and 100 or so other financial institutions
suddenly found themselves operating in an environment of punitive
interest rates on all commercial borrowing. The Reserve Bank sat
back and watched events unfold for two full weeks before acting.
Essentially what happened was that all financial institutions which
had a poor quality debt book and were highly
geared simply crashed. The banks passed on the massive hike in
interest rates to their surviving customers and many major firms
suddenly found themselves paying out their entire annual profits in
interest in a matter of weeks.
8 commercial banks (almost half all the registered commercial banks)
failed to cover their short-term requirements and could not meet
their obligations. Dozens of smaller merchant banks were plunged
into a financial crisis and in boardrooms across the country
directors of firms considered liquidation.
When the Governor eventually acted to rectify matters he liquidated
two of the delinquent institutions, replaced the Board of another
and then simply reversed his carefully constructed policy and
allowed "unlimited" credit to the affected banks at 30 per cent
interest. That is 5 per cent of the current official inflation rate
of 600 per cent per annum. Interest rates
collapsed and it is now difficult to even find an institution that
will take surplus cash on an interest bearing deposit basis. Cash
has fled from the vaults of the worst affected institutions and made
its way to the more reputable ones who are now awash with liquidity.
The immediate effect has been to cripple many new; mainly Zanu PF
controlled financial institutions. A number of high flyers who have
been living it up on other people's money are now in prison and a
widespread investigation is underway. It is doubtful that most of
these institutions will be able to survive without long term support
by the Reserve Bank and other government
controlled agencies - like the National Social Security Authority.
Soft loans have been extended to all the major firms, who were in
trouble because of their highly geared status, but these are only
for six months and then the whole issue must be faced again. There
is no certainty or confidence in what will happen next. And in the
meantime, the whole cycle of speculation
and inflation has started up again. The Stock market, which crashed
by 50 per cent before Christmas is now rapidly recovering the ground
In the field of exchange rate management the Bank has fared a bit
better,but the crunch, followed by collapse of the present policy is
only a matter of time. The idea of the auction system came from the
Confederation of Zimbabwe Industries and was adopted so that the
working group that developed these ideas did not have to use the
word "devaluation", as this is an anathema to the State President.
But they went even further, why not use this mechanism to drive down
the exchange rate and thereby reduce inflationary pressures?
So they announced that the new auction would be "controlled" by the
Bank. A colleague with vast experience of Africa said to me - when I
welcomed the auction idea, "watch how they run the auction - they
will manipulate the process and in doing so will undermine its
effectiveness." Well they are doing just that. Yesterday the Bank
put US$8 million on offer, accepted bids for US$10 million and put
300 other bids - of an undisclosed value on hold.
They then "accepted" bids within narrow margins and announced
an "average" exchange rate of 3500 to 1. The Bank staff is boasting
that they will get the rate down even lower.
Well, perhaps I went to a different University to all those clever
guys, but an auction to me means that you put the product on the
table and then accept the highest bid made. That is not happening
and all that is happening is that certain people (selected on
goodness knows what criteria) are being allowed to buy a scarce
commodity at a low price. They of course, are delighted and will no
doubt sing Gono's praise and vote Zanu PF at every opportunity.
But the impact on our exporters and other foreign exchange
generators has been immediate and serious. Many, if not most, are
now considering their options. Many are considering halting exports
altogether. Chaos prevails.
The only real market arbiter remains the street - dangerous, illegal
and inefficient. That says the auction rate is nonsense and traders
are bidding for the greenback at 4500 to 5000 to 1 - and rising.
Gono, like many of his colleagues in government, will have to learn
the lesson all businessmen
learn when in kindergarten - you cannot buck the market indefinitely
or even for a short time. Every time I do a spell check on my
computer it changes
Gono's name to Goon, perhaps there is some truth to that.
E G Cross
Bulawayo, 3rd February 2004