zimfinalpush
Response from the Opposition
1st February 2007; Harare, Zimbabwe
Why a Monetary Policy Statement (MPS)?
In terms of the Reserve Bank Act of Zimbabwe, the Governor is required by law to issue a monetary policy review each year, which should among other things, discuss current economic and financial trends in Zimbabwe – as well as outline policy initiatives on maintaining price stability and exchange rate management. Essentially, the basic objective of any Monetary Policy Statement (MPS) is to attain and preserve a low and stable rate of inflation. While both the global and regional economic predictions are pointing towards a modest growth in 2007, Zimbabweans unfortunately continue to be saddled with further economic decline. It is believed that the Zimbabwean economy has shrunk by close to 60% over the past 6 years and the country continues to face persistent negative growth. Inflation is expected to reach frightening levels of 5 000% in 2007. The side effects of hyper-inflation have been too obvious: economic distortions, misallocation of resources, erosion of incomes, discouragement of savings, and uneven distribution of incomes. Inflation has a devastating effect on the welfare of the ordinary people. It is no wonder that despite the negative economic outlook, Zimbabweans continue to view the MPS as a source of faded hope. We believe that no matter how cleverly crafted, the MPS can not resolve Zimbabwe’s deep-rooted problems.
As indicated above, a monetary policy framework should be designed to promote economic stability through delivering low and stable inflation. Low inflation as reflected by price stability is fundamental to stable growth levels and employment. And for this to be effective, it requires appropriately designed instruments and policy initiatives which are complimented by an appropriate fiscal policy framework. Unfortunately, this desired situation does not obtain in our country. There is very little macro-economic policy coordination between Monetary and Fiscal authorities in Zimbabwe. This is obvious from the finger pointing which has been exhibited on the issue of RBZ quasi-fiscal activities, between the Minister of Finance and the Governor of the RBZ. It is within this context that the MDC responds to the 2006 year-end monetary policy statement presented by the Governor of the RBZ on the 31st of January 2007.
In the presentation there is a tacit but unexplored acknowledgement that the Zimbabwean economic crisis is essentially political. There is also an admission that this meltdown has been financially beneficial to ZANU(PF) leaders and their supporters. More importantly the Governor admits that the RBZ has failed to deliver on its mandate, in particular that it has lost the battle with parallel market. In essence this is a breaking point monetary policy statement, where the RBZ has essentially abdicated responsibility on the core business of any Central Bank: inflation, exchange rate and financial sector management. There is nothing substantive in the statement on these key functions.
While no inflation targets are given, the Governor warns that if no action is taken "inflation will rise significantly in the near term" and that “Without bold steps, inflation will swallow our economy (sic) to levels not seen before". Thus the only panacea in achieving disinflation requires all stakeholders "to act now" and take part in a "social contract" for monetary policy stabilisation. The figures given by the Governor appear to be mere completion of the formalities of a monetary policy statement, than any serious coordinated results of policy predictions. For example without giving inflation target, the Governor says that "Fiscal and monetary policy restraint" will see broad money supply declining to 450-500% by December 2007 and to under 65% by December 2008. Other figures like the M3 growing at 1 438% at the end of November from 670% at the end of May, domestic credit rising to 1 278% to $526 billion are thrown about without any solid analytical basis. It is difficult to understand how the Governor expects interest rate policy to be "guided by inflation outlook" while in the same breath high interest rates are to lead towards stagflation. Without analysis accommodation rates are said to remain unchanged at 500-600%.
This was not a monetary policy statement by any stretch of the imagination.
Unpacking the Distortions
While the eloquent description of price and exchange rate distortions including their impact is noted, there is need to understand the response by ordinary Zimbabweans to these distortions. Yes, the primary creators and beneficiaries of these anomalies are the ZANU(PF) elites, but once they are in place they drive national economic behaviour. Human beings have rational expectations and hence behave rationally. The distortions in our economy create opportunities for arbitrage. Taking advantage of these opportunities is the rational thing to do. Selling foreign money on the parallel market and selling subsidized fuel meant for farming on the parallel market are the economically rational things to do. Expecting Zimbabweans to behave differently given the circumstances does not make sense. Hence, what is criminal is creating an economic environment that is characterized by staggering distortions and then expecting human beings to act irrationally.
Furthermore the fundamental drivers of the distortions must be understood if sustainable solutions are to be achieved. The Governor argues that stakeholders could care less about the cause of the Zimbabwe economic crisis, they just want answers. This should be dismissed with the contempt that it deserves. Yes, we should not dwell on the causes, but we have to understand them, otherwise we end up addressing symptoms of the crisis and executing unsustainable solutions. The causes of our economic meltdown and hence the distortions include: political illegitimacy, poor governance, corruption, global isolation, poor economic management, and misguided economic controls. These issues must be thoroughly appreciated and used to inform any redemptive framework.
In unpacking the role of distortions in our economy it is important that the role of the RBZ in fueling these distortions be acknowledged: RBZ involvement in quasi-fiscal activities, provision of subsidies, exchange rate control, and buying foreign currency on the parallel market. There has been incompetence, corruption, poor corporate governance and lack of accountability at the RBZ. We have not seen externally audited financial statements of the RBZ. The Governor is the executive chairman of the RBZ board, which means there are no checks and balance at the bank. For example operation Sunrise I; how much did that operation cost, and what were the benefits to the country? Given our current economic crisis how can the RBZ authorize the purchase of a vehicle worth USD138 000.00 in an opaque transaction where a foreign currency denominated loan is advanced to the Governor. Such corrupt and criminal activities at the RBZ must be acknowledged if the Governor’s ranting about ZANU(PF) elites are to be credible. There should be no selective application of analysis.
The IMF has established a code of conduct called the “Code of Good Practices on Transparency in Monetary and Financial Policies – the Declaration of Principles”. The main thrust of the Code is to “establish desirable transparency practices for central banks in their conduct of monetary policy”. Our review of the conduct and practice of the RBZ shows that it fails immensely against these standards.
Deconstructing the Social Contract
How do we remove the distortions? What is required is a dramatic movement towards market forces, by removing all controls. However, there has to be a context and the right environment to make this effective. Of course there will be redemptive pain and probably a political price to pay. We must lead, and leadership is about making unpopular decisions popular.
The Governor outlined efforts that should be pursued in particular the Social Contract. The effectiveness of a social contract as a tool for resolving economic crises in history is well documented. The general framework is an agreement to freeze wages, prices and expenditure in a consensus driven framework involving all key players; government, labour, business, opposition parties, and civic society. However, there are key parameters that have to be in place. A social contract depends on solid political will, total buy-in, inclusive ownership, acceptance of the problems, honesty of participants, and moral suasion. There must be a legitimate government in power, not a regime that is a product of disputed elections. A regime that brutalizes leaders from labour, civic society, business, and political parties, has no capacity to facilitate the requisite discourse. You cannot even begin to discuss the notion of a social contract where there is contested legitimacy of the key stakeholder: the government. There cannot be any total buy-in by all stakeholders to a process driven a by an illegal regime. There is an additional dimension to the debilitating Zimbabwean illegitimacy; the ZANU(PF) succession fight. The different ZANU(PF) factions engrossed in a self-destructive orgy will not even agree on the contents and processes of the social contract. That is how dysfunctional our country has gotten.
In addition, ZANU(PF) as a party must come to terms with the fact that neither rainfall patterns nor external forces will ever replace good governance, good economic management of a country by its own people as the principal resource. Does the Governor really believe that this deeply entrenched interest group who have benefited from the status quo of the massive distortions, will give up easily to a level playing field in a social contract, all within the month of February?
It is also important for Zimbabweans to understand why the Tripartite Negotiating Forum (TNF) processes have always failed. Furthermore, given the nature of the economic crisis our social contract will not succeed without external financial assistance. This help will not be forthcoming, as long as we are a pariah state run by an illegitimate regime.
Consequently, on the social contract our message is very clear: There is need for a legitimate government as a necessary precondition. This can be achieved through a new constitution and internationally supervised elections.
MPS Formulation: The Way Forward
The World over, the trend is now that the monetary policy is formulated by a body called a Monetary Policy Committee (MPC), as in the case of South Africa, Botswana and Britain. It has been found that having a body such as an MPC ensures credibility and wide formalized consultation in the whole process. Sadly, in the case of Zimbabwe one man – namely the RBZ Governor, formulates the MPS. The MPC must be institutionalized as opposed to patronage based consultations as currently practiced. In fact in the past the Governor has been known to brag about how even the ZANU(PF) cabinet was not aware of the contents of the MPS. As the MDC we place high value to an MPS and our Government will ensure that it is openly formulated by an independent entity such as the MPC.
The trend in terms of fighting inflation is to use an inflation-targeting framework. An inflation target framework will entail the setting of a numerical target, which is intended to be achieved over the specific time period. If appropriately done, the inflation targeting framework, will provide a monetary anchor for expectations around which prices and wages are set. Inflation targeting requires the buy-in by all stakeholders so that they can subscribe to it. In addition, it helps make the Central Bank accountable. The RBZ has failed dismally in the past in terms of setting a credible inflation target. Some of the reasons as to why the RBZ has failed include:-
• Lack of coordination with the Fiscal Policy;
• Lack of independence on the part of the RBZ;
• Fiscal dominance which have undermined the effectiveness of any MPS objectives;
• Poor leadership on the part of the RBZ Governor;
• Policy inconsistencies and reversals;
• Lack of credibility;
• Vicious cycle of money supply growth and RBZ induced credit expansion;
• Unachievable policy objectives;
• RBZ financial repressive initiatives such as high statutory reserve requirements;
• Compulsory placement of public debt;
• Counter productive policy initiatives such as quasi-fiscal activities;
• Inability to deal with supply shocks;
• General indiscipline by both the RBZ and the Government
• Lack of intellectual depth in terms of forecasting and planning at the RBZ.
As the MDC, we believe that an inflation targeting mechanism will only work in a fundamental economic reform program which will focus on all the key aspects of this economy, most of which are largely attributed to the ZANU-PF misrule. Given Zimbabwe’s current level of inflation, we cannot rely on monetary targets alone to reduce inflation. On the part of RBZ, what is also required is to develop technical and institutional capacity to model and forecast domestic inflation. Appropriate policy initiatives such as developing econometric forecasting models, Philips-curve models, macroeconomic variable models and other indicator models are required. In addition, a clear and unambiguous commitment to attaining the target should be the primary objective.
Conclusion
Monetary policy matters in Zimbabwe will not be addressed in the absence of a comprehensive stabilization program, underpinned by institutional and political reforms. In particular the starting point is a new people driven constitution, followed by internationally supervised elections. Only then can meaningful efforts such as social contracts and monetary policy formulation take place. What the current RBZ statement means is that this is the end of thinking for the regime of Robert Mugabe. They now agree that they can no longer pretend to apply traditional monetary policy instruments. They then propose to adopt a social contract approach, which we have amply demonstrated to be impossible under the current illegitimate ZANU(PF) regime. This is the end of the road.
Arthur Mutambara
MDC President
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