With Gideon Gono out of the central bank after a decade at the helm, whoever takes over is likely to present a new monetary policy. CLEMENCE MACHADU predicts lower lending rates and a raft of changes to complement the blueprint for economic recovery. Section 46 of the Reserve Bank of Zimbabwe (RBZ) Act empowers the central bank to formulate and implement the monetary policy of Zimbabwe . The Act requires the central bank to provide a description of the monetary policy it will follow, the reasons for the policy, the principles the bank will follow and an evaluation of the preceding monetary policy. It is clear that the new policy will be expansionary and accommodative, as it seeks to redress the adverse financial status quo by increasing the total supply of money and fostering economic growth and stability. This would be largely achieved by lowering interest rates, so that business would be enticed to access lending earmarked for expansion. Lending rates for companies were as high as 30 per cent last year, which discouraged them from borrowing. The situation worsened towards the end of 2013 when the MoU capping bank charges was removed. This saw bank charges and interest rates further plummeting. The finance minister, in his 2014 budget statement, was actually compelled to give a heads-up to banks that government would not hesitate to regulate bank charges and interest rates if banks failed to do the job themselves. The central bank will, through the forthcoming monetary policy statement, look at ways to support current sources of liquidity to boost money supply and deposits, which stood at $3.951bn at 31 October. Because we don't have a currency of our own, we have to earn all the liquidity we accrue, as we can't practice quantitative easing like the US. Our current sources of liquidity are basically exports, money from the diaspora, foreign direct investment (FDI), lines of credit, portfolio investments and other international funds. Exports are largely affected by commodity prices, and it is absurd that more than 80 per cent of our exports are raw materials. The outlook for commodities in 2014 is not that good. Diaspora inflows are also a function of charges and other taxes that are levied for remitting funds. Last year, Zimbabwe received remittances worth $1.6bn and the 2014 budget has proposed to engage with people in the diaspora with a view to increasing their contribution. Funding opportunities The growth of FDI is largely influenced by our business environment as well as our investment laws and regulations. Our lines of credit are certainly affected by the country's bad credit rating and high external debt. Opportunities for funding also lie in international funds, such as the Green Fund , and the finance minister has urged ministries to consider sourcing funding from such international funds to finance key projects. The forthcoming monetary policy will also build on some measures already spelt out in the finance's minister's 2014 budget, which included demonetisation of the Zimbabwean dollar and the scrapping of the new capitalisation requirements for banks. Many may not know that the Zimbabwean dollar continued to be legal tender until December 2013 , when it was officially demonetised by the finance minister. The new capitalisation thresholds, which were as high as $100m for commercial banks, were scrapped to avoid further strain on the financial sector. The 2014 budget also empowered the central bank through assumption of its $1.35bn debt by government and by permitting it to raise about $200m million for the capitalisation of the central bank. The capitalisation is earmarked for liquidity support for the financial sector so that it can effectively play its rÔle of ' lender of last resort'. The provision of a further $100m interbank facility to the central bank in the 2014 budget will also improve sanity in the financial sector and will be elaborated in the monetary policy. Zimdollar conversions The announced budget has also already reaffirmed the continued use of the multicurrency system, with the prospect of introducing more currencies to the basket if conditions warrant. The monetary policy is also likely to elaborate on the issue of conversion of Zimdollar account balances into US dollars, as was proposed in the budget, with $20m pledged for that purpose. Many will however want to know whether $20m is adequate for the conversion. It seems the government used the UN exchange rate of that time, which was US$1 to Z$35 quadrillion, instead of the last recorded official fixed exchange rate of US$1 to Z$100. The establishment of a credit bureau would also be another critical issue that could be tackled by the new monetary policy. Apart from tackling the issue of high loan default rates, the credit bureau would also overcome asymmetric information between borrowers and lenders and gather reliable information on potential borrowers. The bureau would also profile past repayment behaviours of clients, which is key in working out credit risks, thereby reducing the problems of adverse selection. The monetary authorities will be faced with the dilemma of whether or not to control bank charges and interest rates. The MoU, which was in place last year, saw interest rates curtailed to low levels, but suffocated bank operations and reduced their revenues, resulting in them facing operational challenges. The removal of the MoU, however, saw bank charges and interest rates rising to unsustainable levels for borrowers. The monetary authorities will have to come up with an optimal solution to address this dilemma. Aligned with Zim-Asset The monetary policy will no doubt be handheld by its brother, Zim-Asset, to some extent. The medium-term economic blueprint says that "given the resource constraints, government will come up with robust and prudent fiscal and monetary policy measures to buttress and boost the implementation of Zim Asset". The proposed Sovereign Wealth Fund by Zim-Asset, which the central bank would be custodian of, will be outlined in the monetary policy. Zim-Asset has also proposed the following financial sector stability reforms: conducting financial stability assessments regularly, amending the Bank Use Promotion and Suppression of Money Laundering Act, establishing an independent banking ombudsman to enhance consumer protection and transparency and strengthening the corporate governance framework in the financial sector. The policy will also be inspired by the legislative agenda for 2014, as spelt out by the president in his official opening of parliament. Some of the bills that will transform the way we look at the financial sector, which would be tabled by parliament this year, include the Savings and Credit Co-operatives Societies Bill and the Banking Act Amendment Bill. The monetary policy has important effects on aggregate demand, and thus on both output and prices. We would hope to see a policy, therefore, that promoted employment, a low inflation rate, increased money supply and low interest rates – in short, a policy that contributed to the overall agenda of promoting economic growth and stability.
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