THE INTERVIEW LEEROY DZENGA
Reserve Bank Governor Dr John Mangundya last week presented the Monetary Policy Statement which liberalised the exchange rate, while its contents have been subject of debate to date. Our Features Writer Leroy Dzenga (LD) sat down with economist Ashok Chakravarti (AC) who predicted a decrease in prices in the short-term. Below is a full transcript of the interview.
‘LD: Zimbabwe recently saw the Monetary Policy Statement being presented, what is your assessment of the new direction the country`s currency approach is taking?
AK: If you look at the economic policy instruments that any country has got, to be able to stabilise the economy and grow, there are two sides to it. There is the fiscal side and the monetary side. On the fiscal side we have seen some very positive development with the new minister of Finance. For the first time in many years, we have come to a point where there is a fiscal balance. If you have a fiscal deficit and the printing presses are going at high speed then you can forget about stabilising the economy, it is not possible in any economy in the world. What a big fiscal deficit does it that it pumps money into the economy and if it pumps money into the economy it causes inflation. The first problem that needed solving was the structural fiscal deficit and our Minister of Finance has now done this, I would of course, wish him to go further but he has gone quite far already.
He has committed that for the rest of this year and perhaps even longer he would maintain the stance where the government expenditure would match government spending so that we will not have a fiscal deficit which creates a problem for the economy.
The second leg that any country stands on is the monetary policy. On that one, we were in a difficult situation because of the history of our country dollarising. We had gotten into a situation where essentially all our currency and bank deposits were stuck to US dollar at a 1:1 exchange rate. That was not viable and I argued against the position for many years.
A country has to have its own currency and that currency must be able to float and exchange with the US dollar. Unless you have that it is going to be difficult to deal with the balance of payment deficit, because people are going to import a lot because it would be cheap to import at 1:1. On the other hand, exporters who are the ones who are laying the golden egg, the ones who are generating the foreign exchange it is not profitable for them to be exporting at 1:1. To me, this is a very significant and important development that Reserve Bank and Government of Zimbabwe have moved to liberalise the exchange rate, it is a central component of the monetary policy.
That means now the monetary policy can start functioning which means our policy makers now have two legs to walk on, previously we were limping. In my opinion, once the interbank market which the monetary policy has put into place starts functioning properly I think our economy will be able to rebalance itself and we will be able to achieve high rates of growth and in due course Vision 2030.
LD: In the monetary policy, if my interpretation is right there is no inflation targeting. How do you see the inflation rate performing in the short to mid-term?
AC: At this stage, it is very difficult to do inflation targeting because there are so many unknown variables in the economy. We are moving from a situation where we were a dollarised economy into one where the US dollar disappeared and now we are moving into a more normal situation where we are going to have the US dollar as a foreign currency which is mainly for external transactions. In this kind of circumstance, it is very difficult to do inflation targeting, it is unrealistic and it would not be appropriate for the RBZ and Ministry of Finance to do inflation targeting. But what we have to do, is to bring the rate of inflation down and that is the whole purpose of the fiscal policy that is being followed and the monetary policy that is being followed. In my prediction, what we are going to see is a decline in the rate of inflation going forward.
LD: There is a mismatch between the Governor’s statement of RTGS dollars in banks being 1:1 with the US dollar until there is a purchase of forex whereas Statutory Instrument 33 of 2019 implies that all balances, assets and liabilities are in nominal value. Is that not a contradiction?
AC: I am an economist, I don’t want to get into legalities but I have always believed the market leads and the law follows because the law is very slow to change. So when we go back to 2009, when we dollarised the economy you will remember that it is the people of Zimbabwe and the market that decided to use the US dollar it was still illegal in law. The law was changed about nine months later, so I am not worried about the legalities. There is no question of 1:1, the RTGS is now a local currency, it will trade against the US dollar and find its own rate. I suspect the rate equilibrium will be between 3 and 3,5. There might be something in S1 33 of 2019, if they are inappropriate for the market, they need to be changed so let`s not worry too much about the legalities of it. The critical thing is that the monetary policy has removed the 1:1 and people can exchange the money legally because the problem was the parallel market which was creating distortions. I think what the Governor was referring to in the Monetary Policy Statement is that after all we do want to preserve the value of the RTGS dollars which are in all our bank accounts.
To preserve those values there will be other policies which may have to be put in place. Those policies, I think are under consideration they might include certain instruments which will help maintain the value of those RTGS balances.
We cannot just say as long as you keep the money in your account it is 1:1 and the moment you choose to trade in forex it is not. The reality is the RTGS and the Bond are local currency, they have an exchange rate with the US dollar which will be determined by the market.
Going forward, we have to put some instruments in place to protect the value of the RTGS, other countries have done the same. There are two ways of doing it, one is if inflation comes down then the value of your bank account is obviously better. That is one of the targets to ensure that inflation goes down so that the limited money we have does not reduce in value.
The second is to bring in an instrument, for instance in Latin America they introduced an instrument the Brady bond it is a US dollar instrument which can be used to back domestic debt or domestic deposits. Those are things going forward we should consider doing.
LD: Still on inflation, recently you were quoted saying there is room for salaries to increase by 50 to 60 percent. Will that not be inflationary?
AC: What causes inflation is not wage increases but inflation in any country comes when the Government of the day through the Budget or monetary policy pumps more money into the system. So if you print money electronically or physically, that is what causes inflation.
Recently, the Ministry of Finance has put into place a number of taxation measures, firstly you know there is a 2 percent monetary transfer tax, that is going to generate revenue. Secondly, the prices of fuel were increased and most of the increase in the fuel is excise duty which is about $2 a litre, which is substantial. That is going to generate additional revenue. Also, going forward, the market exchange rate is going to be used by ZIMRA for charging customs and other import duties, it is not going to be 1:1.
If I am going to import US$1 worth of goods I am not going to be charged $1 RTGS, it is going to be at whatever the current rate. These are new sources of revenue to the Government of Zimbabwe which they did not have before. Those sources of revenue are very substantial. I have not done a calculation but I am sure if we do an off-hand calculation, it will run into perhaps many billions of dollars.
Based on that, if you look at our wage bill, our wage bill currency is about $3,8 billion in last year`s Budget. So, to me if we do our numbers properly a significant wage increase in line with the inflation is possible. But I don’t want to confirm that, I am saying there is potential for a significant wage bill which is non-inflationary. It is non-inflationary because the money has been taken out of the system, it is given to the people and they bring it back to the system. A lot of people think the moment we increase wages there will be a spiral of prices but this is money which is coming out of our pockets.
The two percent tax is coming out of our pockets, the $2,30 fuel tax is coming out of our pocket, the import duty at a higher exchange rate is coming out of the pocket of the importer and eventually we will pay. So if we take all that money, put it in a pool and give it to civil servant. So it is not only civil servants because the profitability of companies and private sector should also increase as a result of these measures so they should also be able to afford to give higher wages.
I am very much in favour of the idea that these measures in due course can allow wage increases. Let me give you an example, let us say that an exporter previously was exporting US$100 worth of goods, if he had sold it at 1:1 he would have gotten $100 local currency. Now at today`s rate he will get $2,50 but I suspect the bank rate is going to go up to $3. So the same US$100 he is exporting will get him $300 in revenue, can he not give something to his workers?
LD: Still on that, let us say a worker’s salary was pegged at $300 during the US dollar regime, now that we have introduced RTGS dollars, should it be paid at the going exchange rate on their pay date?
AC: I think we need to be clear about this. You see, dollarisation worked during the period from about 2009 to about 2012 or 2013 when the economy was very small and there was a limited amount of US dollars in the economy. After about 2013, during the previous dispensation and I have spoken about this for many years, I had many arguments with the previous finance ministers about the size of the fiscal deficit. I said to him, Honourable Minister stop releasing too much money in the economy and that is going to create a problem. The idea was, we were printing a lot of electronic dollars between 2013 and 2018. That became the dominant currency, although it was written US dollars we always had this idea that it was US dollars but it was never US dollars, let us be very clear. I have said this repeatedly and there are many of my videos some of which have gone viral. About eight months ago, I said the $10 billion that we hold in our bank deposits are not US dollars. So what are they? It is called US dollars but in reality they were not US dollars because they were merely an electronic creation. It is very simple let me explain, supposing the Government of Zimbabwe has no money or let`s say they don’t have enough money, they get an overdraft from the Reserve Bank account.
That means they have got a positive balance in their account. Reserve Bank is minus, but Government has got some money. Then they transfer that money electronically to bank accounts for people`s salaries. Now would you call that US dollars? It`s just electronic money, you can call it mari, RTGS dollars and you can call it a goat but it is not US dollars. US dollars mean that there is some real US dollars which were coming from somewhere and that were being paid to people but that is not the case.
Let`s be clear, if someone got a payment of so-called US dollars, now we need to change our mindset it was called US dollars but it never was US dollars, it was 300 something. It was 300 something, but it enabled people to buy their goods and support their families. The value of that 300 must go up so that people are protected against inflation. In other words, the purchasing power of that 300 must be maintained. So if we say inflation is going up by 40 or 50 percent, to me it is reasonable that the salary goes up by 50 percent because it means that I am not worse off than I was before because I can buy the same goods that I could buy in the past.
LD: How are the RTGS dollars going to last in our economy?
AC: You see, currency is what you transact with, it can be called anything. Currency can either be physical currency or it can be electronic currency. RTGS dollars is basically our Zimbabwean local currency now and its physical equivalent is the Bond Note. There is no difference between the Bond Note and the RTGS dollar in our bank accounts. Many years when the Reserve Bank first introduced the Bond Note, I spoke out against it and I said do not introduce the Bond Note. At that time we were in an inflationary situation and we were in a situation where the Bond Note was likely to disrupt the presence of US dollars in the economy.
Now the situation is different, we have got RTGS dollars, we have the Bond Note and not too many US dollars. So there is no difference between the US dollar and Bond Notes. It is good to have some physical currency to pay for things like parking and commuting.
Currently, according to the Reserve Bank we have about $450 in Bond Notes circulating which is in my opinion that is quite adequate for the moment.
What we need to do is to have a stabilisation of the rate between this family of local currency and the US dollar. Once we have that stabilisation, that Bond Note can be replaced with a formal Zimbabwe dollar. If it is $450 million in circulation, I would recommend that we take that out and put in the same amount because if you put in more it is likely to be inflationary. It is important at this point that we keep our money supply under control.
LD: Still on currency, there have been opinions by some that the easy way out of the current situation we find ourselves in as a country is joining the Rand Monetary Union, what do you think of the proposal?
AC: I want to make it very clear that for many years I was one of the few people who did advocate that we should join the Rand Monetary Union. I advocated for it from as far back as 2009. I am not against the idea of joining the Rand Monetary Union, that is one of the possibilities we can consider in the future. That is one possibility, the other possibility is that we continue with the RTGS system and in due course we exchange that for a genuine local currency. Now, joining the Rand Monetary System has certain advantages and disadvantages. It has certain conditions that you have to put in place, you can’t just join like that. You can’t just join like that the South Africans and the other members of the RMU will not permit any country to join unless they fulfil certain conditions. Those conditions include having a local currency, for instance Namibia and Botswana have their own local currencies. So, whether we want to join it or not, we have to sort out the issue of the local currency first.
My view is that let’s not worry too much about the Rand Monetary Union, that is an option we could pursue in the future but right now either way we have to sort out the value and stability of our local currency. There are also other conditions of sorts which include rate of inflation and fiscal deficit. Those are the things that have to be put in place before our application can be considered by the RMU. So let`s sort out those issues and look at the question of the adopting the rand a little bit later. It does not help arguing about something that can only be made possible when we first satisfy the preconditions then we can discuss on whether it is the best way forward or not.
LD: Where do you think the exchange rate will rest when the interbank market gets into full swing?
AC: I think what is interesting is that you know recently there were protests and violence on the streets, that was a time when there was uncertainty and instability. Even at that time you will notice that the parallel market rate did not go beyond 1:4. Because normally when people become more cautious, the parallel market rates shoot up because they think that their money will be more safe in US dollars.
I am pointing this out because we have never seen the US dollar rate in the worst circumstances going beyond 1:4.
That is happening because the parallel market functions illegally so people are afraid and secondly it happens on street corners, in closed rooms. The amount of transactions that happen over there is very small compared to what we can have on the interbank market. Potentially on this interbank market we can have between $3,5 billion to 4 billion per year, we have made a calculation. So, if this interbank market starts functioning properly which we hope it does.
There are a lot of discussions in place between the involved stakeholders, the RBZ, Ministry of Finance and other to make that the interbank market is functional. What we are likely to see is a stabilisation of the rate much lower than 1:4. The RBZ has started with an indicative rate of 1:2,5 personally I do not think it is sustainable my own feeling is that it will settle somewhere between 1:3 and 1:3,5.
LD: Does Zimbabwe need a retention scheme where part of the money earned by exporters is taken by Government and replaced in local currency?
AC: The current situation is where we have a lot of essential commodities which were being imported by the RBZ to maintain price stability. This include fuel, wheat, cooking oil, power and various items. The idea is that if you liberalise the foreign exchange market in one big bang, then the prices of these essential commodities may also increase very quickly. I am not in favour of the big bank theory, the idea is to do these things gradually. I am also not in favour of the retention but there are two components in the foreign exchange market, there is money earned by the exporter and remittances. That is one component of the market which is around $3,5 billion. We are hoping that will be put on an interbank market which should start functioning properly. Now then the balance is the surrender that the exporters are giving to the RBZ. As we find that the rate begins to stabilize, I think it is proper for the surrender to be removed completely.
But it is quite good to have it in an interim transition phase so that the RBZ does have some foreign exchange to maintain the stability of prices. The RBZ should be able to enter the foreign exchange market if there are some speculators who are trying to move the rate in one direction or the other. They should have some firepower to be able to step into the interbank market and to make it come down to a more reasonable rate. To me, in the long term this must be removed this surrender but many developing countries have had it for a certain period of time. It may not be very long, it depends on what happens on our interbank market.
If the interbank market stabilises at 1:3 or lower, I would recommend that the surrender should be removed immediately. On the other hand, if the rate remains a bit higher my recommendation would be to wait a little bit longer. So, we may remove it in six months, in nine months or one year, eventually it should go. One very big change that has already happened is that in terms of the surrender amount, previously they would surrender it at 1:1 and that was not viable. Now, whatever they surrender to the RBZ would be at the market rate of that, so they are now in a better position than they were before the MPS.
LD: It seems the success of the MPS is anchored on the functionality of the interbank market, are there enough foreign currency reserves to back the interbank market?
AC: Yes, in my opinion there is enough money in the market for the success of this platform. But it is key that the platform operates properly, openly and with transparency. The position right now is that we have quite a substantial amount of money which is held in the nostro accounts exporters it has accumulated over the past many months. They were not releasing because of the 1:1, that is now gone and exporters are now in a position to put the money on the table on a willing buyer, willing seller basis as per the RBZ directive so that money is going to come there. We also have diaspora remittances it is quite a substantial market, the RBZ says it is around $1 billion a year. It has been going through the parallel market, if you have a reasonable rate why should people go to the parallel market instead of normal banking channels. So some of that money should start coming to the interbank market. We should not forget that the RBZ also has its own lines of credits, there are some lines of credit that is has to be able to inject money into the market to stabilize it.
The issue really is confidence and trust, right now the confidence and trust is very low because of our past history so people may not be bring money to the market. But as you begin to see that the market is functioning properly, that no one is touching people`s money I think more money will come onto the market which will result in the rate going towards the direction I am suggesting. I don’t think we have a structural problem in terms of shortage of foreign exchange. The problem was we didn’t have good policy and we didn’t have a proper mechanism for trading. Now the policy has been put in place and the trading mechanism has been put in place, once these two get together and people have some confidence you will find that the market will function.
LD: What`s the ideal preferred exchange rate which will ensure medium to long term price stability?
AC: I think you have to look at it from the point of different sections of the economy. So, let us start with exporters. Exporters have said any rate above 1:2 is good for them because it creates viability. 1:2,5 is good for rate for exporters but it is in my opinion not high enough to limit imports. We need to restrict imports so that there is a balance between imports and exports therefore, we need a higher rate.
So as I see it that the rate fluctuates around 1:3 and 1:3,5 it will be favourable for both sides and assist price stability. In fact, in the short term we may see price declines. Think about it I am a businessperson and I have imported US$1worth of goods, for me to stay in business I have generate RTGS to generate another $1. So, any cautious businessman who wants to stay in business is likely to overprice so that they have enough RTGS to buy US dollars to restock. So the tendency by importers has been to overprice their products so as to be able to buy US dollars in the event of a rate change. This interbank is going to remove that completely because once the rate stabilizes, it means that one can go to their bank with an invoice for their import and bid 1:3,5 and I can get my foreign exchange.
So importers will not be in an uncertain situation on what the rate will be and they will price their products fairly. Once we have stability of the interbank market, my suspicion is that importers will use that rate to price their goods and services. In the long run it will result in price stability, in the short run it will reduce prices.
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