guest column :Kevin Tutani
THE coronavirus pandemic has had a marked impact on the social, health and economic aspects of human life globally. People have been forced to be more health conscious and almost one million lives have been lost to date, including the venerable frontline healthcare workers who have been fighting the pandemic in their line of work.
Countries all over the world, Zimbabwe included, have had to institute lockdowns and other statutory measures in order to contain the global pandemic. The steps taken by governments were painful but necessary. It is unfortunate that national lockdowns invariably slow down economic activity and as a result the global economy is expected to contract by 4,9% this year. A modest global economic recovery is expected next year and is predicted to be around 5,% according to the IMF.
This recovery rate is not necessarily something to celebrate as risks caused by lockdowns and data regarding the full impact have not been comprehensively acknowledged. In the midst of these distressing figures, Zimbabwe’s economy is expected to contract by 7,4% according to the IMF. The government through the Finance ministry is preparing the country’s stimulus recovery package worth $18 billion.
The Reserve Bank of Zimbabwe (RBZ) is also expected to introduce monetary policy tools which will complement efforts of the Finance ministry and enhance the effectiveness of public policy. A number of traditional tools are at the RBZ’s disposal which include open market operations, determining the interest rates and setting of the banking sector’s statutory reserve requirements. Some non-traditional tools can also be exploited by the central bank for maximum impact, coherence and effectiveness of public policy.
The goal is to reduce the impact and level of unemployment, business divestitures and offset a possible drop in government revenue and excessive fiscal pressures which have arisen from the slowing down of the economy during the lockdown period.
The problem with economic challenges is that they are far reaching and extend their implications to become social problems and political problems. This is why the government and statutory entities such as the central bank have to make exceptional focus towards economic issues facing the country. Unsolved social problems have a tendency of creating conditions which generally do not promote advancement of an economy, but its economic vulnerability.
Additionally social problems become political problems and lead to unrest, the rise of third forces to manipulate the current political setting in the country and in some cases a change of government through various illegal means.
In order to avert these social problems and to achieve vision 2030 as laid out by the government the central bank has to expend its resources in a way that will continually complement the Finance ministry for a holistic and impactful approach towards designing an economic recovery plan for the country.
The case of Zimbabwe is unique in the sense that the country is not able to borrow from the typical international financial institutions such as the IMF the World Bank and other global partners in order to mitigate the disasters that will possibly arise from a COVID-19-inspired global recession. This is unlike its neighbour South Africa which has to date secured around US$4,3 billion from the IMF in order to address the economic downturn due to COVID-19 in its territory.
Since Zimbabwe does not have some of these privileges the country has to make exceptional plans and put in extra effort in order to address the impact of COVID-19 on the economy.
The problems facing the country are very unique and some are simply exclusive to Zimbabwe so the country must take unique and exclusive approaches in order to address these challenges.
However, radical economic decisions must be handled with caution as the country needs to first stabilise the economy before taking high-risk policy routes. Several developing economies have asserted that a return to pre-pandemic economic performance would take years.
The South African Reserve Bank governor Lesetja Kganyago communicated the message in his monetary policy’s statement on September 17 stating that: “The economic effects of the crisis have been extensive and a recovery to pre-pandemic levels will take several years.”
One of the key drivers of economic growth that the RBZ should be interested in at this moment is investment. Although the RBZ does not formulate full-fledged policies to promote and create a positive investment climate, the bank should be open to the fact that it needs to co-ordinate the domestic financial sector in order to encourage domestic savings through the local banking system.
When there are no savings in the local banking system it becomes unachievable to target a growth in investment, especially in the case of Zimbabwe where foreign investment inflows have been very limited.
The failure to attract foreign investment as a result of Zimbabwe’s decision to self-determine and exercise its rights as a sovereign State should not be the dearth of investment within the country.
The central bank, leading the rest of the banking sector should, therefore, design various strategies to encourage domestic savings which will provide funds for business and government borrowing and thus fuel a growth in investment.
There is a need to substitute focus on foreign investment which is not forthcoming with focus on local investment which may be easier to control.
Resources must be assigned by the banking sector, with the leadership of the RBZ towards unique measures such as rolling out publicity campaigns which encourage a savings culture.
In the background of the current economic challenges, there must be useful and frugal use of resources nevertheless. Emphasis must be on rewarding savings outside of simple monetary benefit or interest rates. Since there are no foreign capital inflows, the onus is on the RBZ to maximise the use of local investment resources by the domestic financial sector.
The private sector must be encouraged to save and the elements that drive a savings culture and behaviour of this sector must be investigated, acknowledged and addressed. Savings can also slow down consumption expenditure, but in the case of Zimbabwe the country has had a very poor balance of payments and an increase in savings will likely reduce imports and strengthen the country’s foreign exchange position.
In the same vein it can, therefore, be advised that the RBZ should involve itself especially at policy or advisory level in campaigns such as Buy Zimbabwe campaign which encourage purchasing of more and more local products without having to engage in unnecessary trade wars or policies which can be detrimental.
It is easier to encourage people to buy local products than to engage in a trade war which has disastrous ramifications for the country. As stated before Zimbabwe is facing unique challenges and unique approaches must not be overlooked.
The Zimbabwean government is expected to have heavy fiscal pressures in 2020 due to the need to attend to its heightened responsibilities. These responsibilities include ensuring social relief by providing resources to households which provide basic services for sustenance of life, ensuring job security of government employees and creating jobs, ensuring the existence of a strong healthcare system and providing relief to businesses affected by the pandemic through concessions such as tax relief or tax deferrals. This is a very critical fiscal year for the government because it has had to work diligently to meet its revenue targets amid the slowing down of businesses during the lockdown. The tax revenue targets for the half year to June have thankfully been met according to the Zimbabwe Revenue Authority (Zimra), but the pressure to spend and the demand for government expenditure are extreme. With such a situation at hand the government will have to make use of borrowings from the domestic banking sector and these savings must be supported by private sector deposits. Thus the RBZ should apply itself as pervasive as possible to achieve the best results for the economy and to complement government’s fiscal policy which will be limited by massive fiscal pressures.
The importance of the RBZ working hand-in-glove with every player in the financial sector has to be emphasised. Zimbabwe is at a point where statutory institutions including the RBZ have to use the power of suasion in order to bring effective domestic change. Economics is an area which depends on and is affected to a great extent by sentiment. Thus when suasion is not used, belligerence can arise which used results in disruption of a lot of economic indicators and cause a tanking of the economy.
The RBZ recently, through its exchange control mechanisms together with the Ministry of Finance, managed to stabilise the value of the local currency on the foreign exchange market auction system. The local currency has firmed from $83,32 to $81,70 in the first two weeks of September. This can be attributed to investigations which led to an unearthing of some illegal drivers of foreign exchange valuation in Zimbabwe. Among these drivers, stock market speculation and arbitrage were identified. In order to gain from the price differential or the arbitrage of the pricing of the stocks listed on dual stock markets, speculators were purchasing fungible stocks on foreign stock exchanges such as the London Stock Exchange and Johannesburg Stock Exchange and offload the stocks on the local stock market and ultimately sell the stocks to purchase foreign exchange on the local parallel forex market otherwise known as the black market. Since profits were being made in large numbers, the cycle was repeating itself and driving up demand and the exchange rate for US dollars in Zimbabwe. The stocks were identified as PPC, Seed Co Ltd and Old Mutual. Thereafter, the RBZ went on to mention other players within the financial system that were fuelling runaway inflation and worsening the country’s exchange rate position through illegal mobile money transactions. The RBZ went on to set out legal parameters to control mobile money transactions such that they would not lead to a further depreciation of the Zimbabwean dollar. Constant investigation of the market in order to understand what drives the behaviour of the market is, therefore, necessary. The RBZ Financial Intelligence Unit has its work cut out in this regard and should it use tools at its disposal in order to maintain a stable exchange rate for the Zimbabwean dollar which is necessary for economic recovery. In this time of massive fiscal responsibility on the side of government, the importance of a stable exchange rate for economic growth cannot be overemphasised. There is also a need to unearth other factors which are reinforcing the over-valuation of the US dollar and other foreign currencies because some experts argue that the Zimbabwean dollar is excessively undervalued while foreign exchange is overvalued.
Typically foreign exchange valuation can be calculated by using one of many methods which include purchasing price parity, behavioural equilibrium, fundamental equilibrium, etc. However, a basic comparison of export revenue to import demands should provide an almost fair valuation of foreign exchange, all things being constant. Exchange rate premium should ideally be derived from the disparity between the trade and the balance of international payments. However, in Zimbabwe foreign exchange is demanded by the common man as a store of value since some have lost faith in our banking system and the local currency. There is need for RBZ to work on methods to bring back trust and positive sentiment towards the local currency and the banking system. Sentiment is always important as most professional researches reveal that it can determine economic decisions which can alter a country’s economic fate.
Truly, sometimes a country’s misfortune can be traced to simple negative sentiment by some economic players, households and firms included. Demand for foreign exchange cannot be understated. It can be difficult if not impossible to legislate sentiment. Therefore, campaigns and moral suasion are important and desirable tools which can be used in order to contain the avoidable depreciation of the local currency through negative sentiments
To avoid designing policies and approaches that fail, importance must be assigned to the need for accurate data collection. RBZ policies and, of course, government policies must be guided by accurate data. Actions and approaches which are not supported by data may be detrimental, inefficient and can possibly lead to economic collapse. To avoid such, the RBZ must understand the importance of accurate data collection on its part and on the part of statutory bodies such as ZimStat for the success of the bank’s policies. Data-driven policies will likely yield positive results and, therefore, less risk. Inflation figures must be accurate and timely and other indicators which are used for data interpretation by the RBZ. A delay in designing and execution of policies can occur when commitment to accurate data is emphasised, but the benefits of effective and relevant policies will outweigh the delay.
Interest rates being a tool available in the area of influence of the RBZ must be used accordingly in order to sustain economic activity on the domestic market. Open market operations are also a traditional tool expected to be used in a relevant manner which is suitable for creating money supply on the domestic market and encouraging economic activity.
Another traditional tool is statutory reserve requirements . Reducing the required statutory reserves will free up funds available to households and businesses via banks in order to sustain economic activity. These traditional tools will aid recovery of financial markets domestically as reports are showing that there are limited financial flows to developing and emerging economies from advanced economies as a result of accommodative economic policies in the advanced economies. In other words foreign capital in the direction of developing and emerging economies is expected to be limited in the short term.
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