ZIMBABWE continues to feel the effects of the Russia-Ukraine war given the connectivity of the whole world as a global village.
The extent of the damage may not be immediately known as there are a number of factors to consider. Group Editor-In-Chief Guthrie Munyuki recently hosted Reserve Bank of Zimbabwe governor John Mangudya on 3Ktv’s programme, Vantage.
Below are excerpts of the interview.
Q: The government pins hopes on de-dollarisation. How far have we gone in this regard?
A: De-dollorisation is a process. It’s a process of substituting the foreign currency transactions with local currency transactions. Therefore, it’s a process that we have begun, which started in 2019 as you are aware, after the Statutory Instrument 33/2019 was put in place wherein we are saying we need to use our local currency as our functional currency and that process is ongoing.
We are going to continuously be doing that process up to 2027. It is a gradual process to ensure that as Zimbabweans we use our own local currency.
This is not an overnight exercise. It’s not a forced de-dollarisation, but it’s a market based de-dollarisation wherein over time we need to reduce the number of transactions in foreign currency in the economy over a period of time.
You need to know the definition of de-dollarisation first. Therefore, it means that it’s a gradual process, it’s not an overnight affair or event. Throughout the whole world, that’s what de-dollarisation is all about. All countries that have de-dollarised have done that over a period of time. Look at Israel, Chile, Ethiopia, DRC, Angola, to mention just a few.
We are talking here about a gradual process of substituting the foreign currency transaction in an economy by a local currency and, therefore, by end of the day even after the five-year period from now we are still going to have some residual de-dollarisation within the economy.
If we go down to say 20 percent of transactions in an economy, we say that the country is substantially de-dollarised because 80 percent of that transactions will be in our local currency. We are quite happy with where we are so far and it’s a process, it’s a journey and we are on a journey to de-dollarisation.
Q: Do you think that the ordinary Zimbabwean understands what de-dollarisation is and do you have their buy-in?
A: The ordinary Zimbabwean knows exactly what is meant by de-dollarisation. For starters, substantially people in Zimbabwe earn in their local currency. Their bank accounts are in their local currency therefore they know that what they’re earning is a local currency which will be used in their own economy.
When they want foreign currency they need either to go to the auction or to go and exchange it at the banks. As long as they are using the local currency which they are accepting and they are earning. In any case this economy has no capacity to earn in foreign currency for everyone who is working in this economy.
If Zimbabwe has got four million people who are working in this economy and you don’t have enough foreign currency to sustain that — in fact we have been in this journey before when Zimbabwe dollarised the economy from 2009 to 2018. We have seen the difficulties of it whereby we were mixing virtual money and physical money and quality US dollars.
This is why today we always have a challenge of blocked funds because those are the funds that are going to be remitted out of the country because there was no foreign currency but yet you were calling yourself dollarised economy so where were the dollars?
If Zimbabweans understand what is block funds they understand that those funds were blocked in the economy because there was no foreign currency to take out of the country and banks had their positions that they were also incapacitated by this dollarisation. So yes the ordinary person knows that he’s earning local currency so let’s use this local currency.
Q: So if it is clear then why this contradiction of people having a clamour for full dollarisation when we are on a de-dollarisation programme?
A: It’s very simple because the local currency is used for transaction purposes but the USD is used as a store value. It’s an issue of concern about the store value issues of the phenomenon. People prefer to hold the foreign currency, the USD, for purposes of storing value. It’s about inflation.
When inflation is high throughout the whole world, Zimbabwe included when inflation is high there is also a tendency of economic agents seeking for a currency that can store value. That’s why as the Central Bank together with the government our job is to ensure that there’s macro-economic stability, there’s physical consolidation which means reducing access of borrowing by the government from Central Bank and that there’s a tight monetary policies to ensure that we don’t create too much money in the economy so as to support our own local currency to reduce inflation.
Once inflation goes down the tendencies of people wanting to hedge against your inflation by having foreign currency also goes down. That’s the philosophy behind it. So what people are doing is not abnormal, it’s very normal because they want to ensure that they preserve their money because once bitten twice shy.
Zimbabweans have lost their money before in 2008 as you are aware and because of that reason, once bitten twice shy scenario or syndrome people then tend to hold onto the value that has got value otherwise they use the local currency for transaction. That is why our aggregate demand has gone up.
Aggregate demand has gone up because the velocity of our local money is higher than the velocity of circulation of the foreign currency. When you have a high velocity circulation of a local currency it means that people want to spend the Zim dollars faster than the USDs and therefore that causes sales in the shops to go up.
When sales go up in a shop it means the aggregate demand goes up. When aggregate demand goes up it means that the economy also expands. That is why we have got high capacity utilisation which is happening now. You see beverage companies are increasing their production. If you look at those ones who are doing cereal they are increasing their production. It’s because we are using our local currency.
If you are using foreign currency for transaction which is used as a store value the aggregate demand goes up at a slower and lower levels of demand. As a result there’s good to it. What we need to do as the Central Bank and the government of Zimbabwe is to ensure that we work on the fine balance between growth of the economy and inflation.
Q: Why are we still having lots of Zimbabweans choosing not to open FCAs and bank with banks so that their store of value that USD is safe-guarded from armed robberies that we are seeing in the country?
A: Again it’s about choice, life is about choices. You need to understand our context of the economy. A number of people who work in the diaspora in this country, most of the money that comes in foreign currency, yes it’s from the diaspora. Per US$120 million or so on a monthly basis from the diaspora.
Those who are selling gold, artisan miners are paid in foreign currency therefore we have got a sizable chunk of foreign currency in this country. People keep their money either in their pockets for transactional purposes or others they bank and some they think that when you have got their money in their chest it’s more secure than in a bank.
That is expected in an economy and therefore what we are doing is to encourage people, consumers to bank their money in the banks whereby they can get their return. That’s why we agreed with the Bankers Association of Zimbabwe to ensure that the banks provide interests or they pay interest on the deposits which they are doing right now- 2.5 per cent, five percent of foreign loan or on foreign deposits it’s quite high by international standards.
So it’s not about lack of interest on the banks but what we have also discussed with the banks is to reduce their bank charges which sometimes are on the higher side in terms of account maintenance charges which are on the higher side but that’s not the reason why people keep their money in their pockets. People keep their money in their pockets because of historical experiences.
As I said earlier, once bitten twice shy, people lost money in this country before. We need to empathise and sympathise with the people of Zimbabwe. Therefore these are non- economic factors which are used for coming up with the right conclusion.
So when money comes from the diaspora coming through the money transfer agent, people take their money and put it in their pockets. They go and shop buying goods in the informal sector where cash is more like “king” and as you are aware our economy is highly informalised.
We have got about 60 percent of our economy being informal and 40 percent thereabout being formal. Because of that reason in the informal sector it means that you use cash and therefore that’s why they keep their money in their pockets but at the end of the day that money ends up in the banks because when you go into the formal sector you are going to buy cooking oil, you shall buy milk-milk is produced by Dairibord, it’s produced by Dandairy, Prodairy that money ends up into those companies who then bank.
So we have seen the deposits going up in the banking sector from as low as US$800 million but three years ago now we are talking about US$1.7 billion as deposits in the FCA accounts of this country so we are quite happy with the foreign currency balances in the banks as opposed to complaining about why people are keeping their money in their pockets. People always keep money in their pockets for transactional purposes but most of it I think is in the banks.
Q: What have you done to eliminate turbulence on the foreign currency auction including double dipping by crooked businesses trying to destabilise the forex market?
A: Let’s interrogate this turbulence which happened in the four months of last year, what was its origin? The origin of that turbulence is that after the farmers were paid their money through the Grain Marketing Board of a good $48 billion for the sales of their maize and wheat which was very good by the way, it was good in terms of production in terms of growth for agriculture.
The downside risk of that payment by GMB from borrowed money from the government was that money supply; the money which went into people’s pockets was high. That $48 billion needed a home and the home for that money is either you go and buy goods and services or you buy foreign currency or you come to the auction to look for foreign currency because as we have said that the velocity of circulation of local money is high so whenever you get it you want to spend it when it still has value.
That turbulence therefore came because there was a great deal of money put into the economy from the harvest process so that’s the turbulence. Right now we have seen that the local currency is in short supply, there’s no local currency right now in the market because there’s nothing that people are selling to get the money.
So we have seen the stability in the parallel exchange rates over the period of about eight to 10 weeks right now and therefore that shall translate into the stable price in Zimbabwe. Unfortunately that stability is also now being affected by the global price increases. We have seen what’s happening in this conflict between Russia and Ukraine.
You see that the prices of commodities have further increased after having increased because of Covid-19 supply chain constraints. So you have a double price increase. You are looking at cooking oil for example the crude soya oil has gone up initially it was about US$1 200 now it has gone further again say to US$1 500- US$1 600. Look at fertilisers, ammonia used to be US$800 now it’s US$1 600 so that inflation is imported inflation outside Zimbabwe’s control but we are going to endure it. It’s going to pass through into our pricing for the Zimbabwean so yes there’s that turbulence.
You talk about the action system- the auction system has been very inclusive, very dependable and it has been used by the corporates in this economy to increase production. We have seen quite a lot of companies increasing their footprints into the economy. It has also increased domestic production as opposed to importing a finished product.
If you look at the shops right now most of them are now selling maybe 80 percent maybe somewhere there of the products that are coming from the local market from as low as 30-40 percent during the time under dollarization so these are the benefits of using our local currency and therefore we have seen an increase of production due to the usage of the auction.
Just to underline that, if you look at the manufacturing sector in this country last year they exported almost US$189million worth of exports but they utilised almost close to a billion dollars from the auction. This means the auction system was used as a redistributive platform whereby funds from the mining sector exports redistributed to the industry to produce goods and services and that has helped quite a lot.
Q: Zimbabweans are asking that we keep on having these recurring problems and authorities appear to know what the problems are. Why can’t we act on them decisively?
A: An economy is not a warzone. I think you have heard the President speaking about this term many times — stone upon stone, brick upon brick. What it means is that it’s gradual. If you ask me what it means from my financial banking economic perspective it means that it’s gradual.
Maybe that’s one of our weaknesses, we believe in gradual approach in a moderate approach because if you try to hammer an economy the way you think you might get negative results in an economy. We are working on that very closely with our financial intelligence unit, our exchange control, the security arms of the government to ensure that those indisciplined elements in the economy are punished for their sins.
We need to ensure that we do it in moderation. Sometimes the economy can expand but at the same time we minimise those people who are doing their shenanigans. It’s not necessary for an income we want market discipline we want to make sure that people comply to the rules and regulations that’s why we are quite happy that Zimbabwe has been removed from the FATF grey list which by the way is a very important movement which shows that Zimbabweans comply to the anti-money laundering and counter financing of terrorism rules and regulations. However, it does not mean that we have arrived; we need to continuously work on those areas of compliance.
We are talking about compliance, what are we doing with compliance? We need to ensure that those that are non-compliant we deal with those people who are non-compliant. How do we deal with the non-compliant- through our security agents. How do we deal with them- by fining those who are non-compliant but as I’m saying we need to have a moderation in running an economy so at the end of the day we don’t use axes to run an economy.
Q: Moving on to this year’s agriculture outlook, are we expecting the same results as the previous season given that there are some reports that not all areas received the anticipated rainfall?
A: A very good question, the way we see it is very simple. The mining sector is going to remain bullish; it’s still going to grow because of the prices of commodities which are going up. In terms of agriculture we expect a moderate growth not as bullish as we had initially anticipated on account of the fact that in some areas especially the month of February we didn’t have much rain.
We received plenty of rains in January and less rains in February and some areas the crops have been trying have been starting to dry. The rains came in January, the dams are full and those on irrigation are irrigating their crops which means we are on a balance.
We believe that we are still going to have a growth which is not as good as we had initially anticipated but still a good growth. We are looking at 6/7 which is about 70 percent which is good enough for purposes of sustaining the economy.
That’s our projection as the Central Bank; we are still waiting for the ministry of Agriculture which is doing the crop assessment throughout the whole country. But from the prior analysis of the economy we think that yes we are going to have good agriculture but not as good as it was initially anticipated. We have also seen that tourism has started to pick up so we are also happy with that area.
Therefore our figure of 5.5 percent growth in 2022 still stands. It was 7.8 percent in 2021 and we think that around that we will be able to achieve it. Obviously with wheat we are going to have a higher yield because dams are full and the winter cropping season has not yet started. When you now look at maize and wheat, we are going to have a good yield.
Q: So just to dispel the jitters of ordinary Zimbabweans, the country is not anticipating more importation of the grains particularly maize because we are still within the targets?
A: Food inflation in this country sometimes reflects the international movement of prices, not necessarily local. Yes we are not anticipating a high increase in the price of goods and services.
That’s the reason we say we need to continue producing for ourselves. If you look at what is happening now with the geo political situations in the whole world. It’s safe that as Zimbabweans we need to produce food for ourselves so that at the end of the day we stabilise our prices, we also have the availability of the product in Zimbabwe.
Therefore the more you do more on soya beans, wheat so that we minimise the import of wheat and that way we don’t become dependent on other countries so you are right we expect the food inflation to remain low because of local production.
Q: To what extent are we likely to be affected by the Russia- Ukraine war?
A: Definitely we will be affected because most of imports and also the global connectivity of the whole world is such that when one or two producers are incapacitated to produce more, it means that the supply goes down. When the supply goes down, demand is high and therefore prices go up in order to absorb that increase in demand.
Obviously as we have said, fuel prices have gone up per barrel and we are also looking at as I said earlier the price of wheat because most of the wheat was coming from Ukraine and Russia and therefore when the demand goes up the price also is expected to go up.
We are going to be affected and the fertilisers have gone up as you are aware and these are the inputs into our production. Once an input has gone up in its price it also affects the output’s price and therefore we will definitely be affected but on balance we now need to ask ourselves the prices of commodities that have gone up how do they balance out with the price of the commodities that we are exporting?
Gold prices have gone up but we are an exporter of gold. Chrome, nickel prices have gone up. If those prices have also gone up you need to look at the net effect. Therefore if you want to export too much you might end up in a positive net position.
But if you rely on imports you end up in a negative net position. So it depends on the balance between what we are importing and what we are exporting. In this case we are still studying the situation on the ground but in terms of being affected we will be affected in terms of prices. In terms of the national effect we need to look at what we are exporting and what we are importing and see the fine balance between the two.
That will tell us whether we will be affected negatively or positively. As I have said earlier in 2021 we were affected positively. While the price of fuel went up, the commodity prices of minerals went up also therefore to counter balance the imports of fuel. – Daily News