Wednesday, February 10, 2010

The December 2009 Monetary Policy Statement:

The December 2009 Monetary Policy Statement:
A comment

In the absence of statistics from most other sources, the Reserve Bank’s assessments of the value of economic activity in broad business sectors provide a useful window on the extent of progress actually achieved in the past year. However, most of the money numbers do not offer much support to official contentions that a recovery is in progress.
These assertions are in phrases such as:
Recovery signs are discernible in the economy, following the implementation of various policy interventions…
The prevailing sound macroeconomic policies have resulted in the restoration of price and macroeconomic stability.
This enabling environment has provided a solid foundation upon which the resuscitation of business operations has been anchored.
It is against this background that industrial capacity utilization has increased appreciably to between 30-45%.
The improvement in the general macroeconomic environment and the consequent increase in capacity utilization have contributed to price stability…

A more accurate description of the changes in 2009 would have to place the emphasis on the Reserve Bank being forced to abandon the Zimbabwe dollar and to legalise the public’s formerly illegal use of US dollars. This permitted the commercial sector to restore supplies of goods to retailers. The price stability is entirely the result of Zimbabwe’s use of relatively stable currencies from other countries, not the claimed increases in local capacity utilisation.
Evidence from other sections of this same Monetary Policy Statement call into question the claim that capacity utilization has improved from below 10% to between 30% and 45%. For example, in the Gross Domestic Product analysis, manufacturing output is said to have increased by 8%, not the several hundred percent implied in the capacity utilization estimates.
As many of the higher volume manufactured goods would normally come from milling companies and those that are carrying out value-adding processes to minerals, recoveries of the extent suggested await the return of large maize, sugar, tobacco and wheat harvests as well as the recovery of Zisco steel production, nickel, ferrochrome and asbestos.
The few details offered on these state that maize increased by 148% and tobacco by 22%, but admit that sugar declined by 4% and asbestos by 56%, while output of nickel and ferrochrome came to a standstill. Steel production also stopped and cement output was slowed by technical problems, but these are not mentioned in the statement. However, mineral exports fell by 4,9%.
Total export shipments fell by 8,9% in 2009 and shipments of manufactured goods in particular fell by 30,9%. For agricultural products, exports declined by 24% and the separately recorded horticultural exports declined by 41,8%. Road freight values for the year fell by 21,8%.
Despite these indicators, the Reserve Bank claims that the Zimbabwean economy “now possesses all the major ingredients for a remarkable take-off”. However, it accepts that the achievement of this will require that the “Inclusive Government stays the course in promoting the spirit of mutual cooperation with a common, Zimbabwe First objective”.
Unfortunately, too many of the signs suggest that the Inclusive Government has not stayed the course and the political change process has stalled. Despite the steady stream of claimed advances, every one of the issues in contention six months ago has yet to be resolved and every proposal that could have a bearing on whether the country might attract inflows of investment funding or external lines of credit has sent discouraging signals to those who might have helped.
The Reserve Bank does accept the need for fiscal and monetary policies that will complement each other and it pledges to fully co-operate with the fiscal authorities to build a prosperous Zimbabwe, but it places emphasis on the claimed need to devise “winning formulae for the removal of sanctions, as these remain a monumental binding constraint to Zimbabwe’s full recovery”.
At a meeting in Harare on February 4, which was intended to discuss the adoption of a debt-clearing strategy for Zimbabwe, government officials attempted to persuade the dozens of delegates that Zimbabwe deserved debt forgiveness. This was based largely on a claim that the debt arrears had arisen because of the imposition of sanctions.
Unfortunately, attempts made by members of the diplomatic community to argue that the sanctions were targeted at known individuals for known indiscretions, and not against the economy as a whole, were not accepted. The meeting also appeared unwilling to consider that Zimbabwe’s difficulties in settling its debts might have arisen from government’s decision to force the closure of the country’s major export earner, its commercial farming sector.
This week, Zanu PF members of Parliament are proposing to debate a motion calling for the lifting of sanctions that MDC members are accused of having instigated. The move is apparently a deliberate attempt to promote further disunity in the already fragile Government of National Unity.

With effect from 1 February, 2010 the Statutory Reserves Ratio will be cut from 10% to 5% of bank deposits. The Reserve Bank is to hold 2,5% and the other 2,5% will be kept in an offshore bank, authorised by the Reserve Bank.
In the Monetary Policy Statement, the Reserve Bank noted the decisions by some banks to hold on to their deposits, rather than offering the economy meaningful support through well-appraised lending. Some banks have been lending amounts that are less than 20% of their total deposits, but the Reserve Bank’s claimed belief that much more lending is possible is somewhat countered by its own disclosure that short-term deposits in December 2009 made up 97,8% of total deposits.
While exhorting the banks to continue protecting their asset books through rigorous pre- and post lending evaluations of borrowers, the Reserve Bank revealed that broad money continued to be dominated by transitory deposits. In October 2009, the short-term deposits were said to have reflect low income levels and punitive service and administrative charges that discouraged savings and kept people inclined to remain in a cash economy.
Credit to the private sector by banks amounted to US$546,7 million in October 2009, which translated to a loan-to-deposit ratio of 55,1%, compared to 35% recorded in January 2009. By December, total loans and advances had increased to US$639 million, but formed 48,19% of the US$1 330 million deposit base.
The loans-to-deposit ratio, less offshore financing, or loans advanced from locally mobilized funds, increased from 26,1% in January 2009 to 49,3% in October. The Reserve Bank believes this indicated lower risk averseness of banks, while an increase in credit to the private sector is said to have supported the “registered growth” in industrial capacity utilization from below 10% in January to between 30% and 40%.
However, this claim is called into question by a 30,9% fall in total manufactured goods exports from 1 January to 31 December 2009. Manufactured exports in 2009 were valued at US$152,46 million, compared to US$220,74 million in 2008.

Transactions related to investment income, such as the remittance of dividends, profits, capital appreciation proceeds and offshore loan repayments, have been fully liberalised. However, the country’s Capital Account has been only partly liberalized, so offshore Capital Account transactions still have to be vetted. The Reserve Bank says this remains a necessary measure to ensure that the country is cushioned against global economic and financial shocks.
In terms of the current Capital Account policy, institutional investors such as pension funds have not been permitted to invest their funds offshore. However, in order to take advantage of higher investment returns, proposals to invest such funds offshore can be submitted to Exchange Control for consideration.

Gold producers who were obliged to accept gold bonds by way of compensation for funds removed from their Foreign Currency Accounts towards the end of 2008, are finding that the Reserve bank is unable to settle, now that the bonds have reached maturity. “Constructive engagements” are said to be in progress between the Bank, the Ministry of Finance and the bondholders, resulting in the bonds being rolled over for another six months “to allow the engagement process to bear fruit”. Unfortunately, some of the bonds were discounted in the capital markets and the creditors are now international banks.

Beneficiaries of the Reserve Bank’s Farm Mechanisation Programme in 2007 are reminded in this policy statement that the cost of the agricultural equipment issued still has to be recovered. The Reserve Bank is now finalising procedures for receiving payments for the equipment. Beneficiaries of the programme are to be sent detailed statements and their payment options.

In its introductory paragraphs, the Monetary Policy Statement makes the point that, as a survival necessity, virtually all aspects of public sector policy implementation were thrust upon the Reserve Bank during the years from 2004 to 2008. This, it states, has now changed.
The operations of the Central Bank have been streamlined within the generally stable macroeconomic environment, and government ministries and other public institutions are supporting this “by doing what they are supposed to do”. The Reserve Bank insists that it will not interfere in any areas outside its statutory mandate if those responsible for those areas are doing their job.
As Banker to Government, the Reserve Bank confirms it will continue to manage the country’s gross international reserves, including the Special Drawings Rights account at the International Monetary Fund. However, it accepts that the Ministry of Finance is responsible for the actual usage of these funds.


While this Monetary Policy Statement does clarify a number of issues, the basic constraints still holding back the Zimbabwe’s recovery remain unchanged. On the economic front, the liquidity shortage is not being overcome quickly enough to help bring about improved production and export volumes.
Equally seriously and very unfortunately, policy decisions, such as the proposals to proceed with the enforcement of the Indigenisation and Economic Empowerment Act will serve only to discourage investment inflows.
The main problems therefore remain political. A focal point in the coming months will be the re-writing of the country’s constitution and every effort should be made to ensure that this task is completed in a professional manner.

John Robertson
February 9 2010

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