Africa And Aboriginal Tuesdays: Monetary Policy in Zimbabwe by Eddie Cross

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 peoples 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.



Eddie Cross is a Secretary for Economic Affairs, and executive member of the Zimbabwe opposition political party, Movement For Democratic Change, (MDC). Mr. Cross can be contacted via e-mail at: egcross@africaonline.co.zw

Tuesday, February 3, 2004