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 institutions.
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. Chaos prevails.

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 lost.

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