By Dr Tim Rainhard- In September 2019, Finance and Economic Development Minister, Professor Mthuli Ncube, appointed a nine-member Monetary Policy Committee (MPC) to influence the Reserve Bank of Zimbabwe (RBZ)’s monetary policy.
Crucially, the MPC’s wide-sweeping responsibilities extend to setting limits on the Bank’s open market operations, ensuring price stability, and determining interest rates.
Chaired by Central Bank Governor, Dr John Mangudya, the Committee has done exceptionally well – by all accounts – in discharging its functions in spite of the well-documented difficult socio-economic environment under which it operates. The price stability that set-in after the foreign currency auction trading system was introduced in June last year is one of the MPC’s many achievements that are difficult not to acknowledge even amongst some of the RBZ’s harshest critics.
The same goes for the positive sentiment that has been restored after eluding the domestic economy since June 2013, when an uneasy coalition government between Zanu PF and the MDC ended.
On a few occasions, the MPC has, however, been found wanting. The irony of it is that in those few cases, Mr Eddie Cross would have wittingly or unwittingly put his foot in the mouth, forcing the entire RBZ machinery to do some damage control.
Unlike your typical, conservative banker, the chatty economist enjoys the limelight that comes with being a member of the MPC. He, however, gets excitable easily, especially in front of the cameras. He is thus prone to prematurely letting the cat out of the bag and deodorizing facts when he is in front of his audience.
While this served him well in the various technocratic roles he occupied in the Rhodesian government and during his 18 long years as a senior opposition politician in the Movement for Democratic Change, Mr Cross seems to be forgetting that he is now part of the nerve-centre of a financial system that is extremely sensitive to changes in macro-economic factors.
As a result, faux-pas have trailed him. Perhaps, his lowest point came less than a month after his appointment into the MPC when he ‘declared’ that a new currency was to be introduced in November 2019, forcing the secretary for information, publicity and broadcasting services to rebuke him strongly.
“We would like to make it clear that Mr E. Cross does not speak for the Government of Zimbabwe. Neither does he speak for the Reserve Bank of Zimbabwe (RBZ). His views are personal and not indicative of government’s policy thrust,” read part of the statement issued by Mr Mangwana on behalf of government back then.
That statement fell on deaf ears. Towards the end of last year, he sensationally claimed that the RBZ was introducing ZW$50, ZW$100 and ZW$200 banknotes to increase physical money supply from ZW$1,4 billion to about ZW$3 billion.
“Some time ago, we made a decision in the MPC to introduce new ZW$200, ZW$100 and ZW$$50 notes. I understand that this is being dealt with by the Governor working with the President because the President has to approve the designs and everything else…But I understand that the ZW$50 note will be available early in the New Year,” he boldly clamed.
Dr Mangudya had to issue a statement to set the record straight and calm jittery markets, which were alarmed that this was going to fuel inflation and the exchange rate, which has stabilised within the ZW$82 range against the United States dollar (US$) following the introduction of the auction system in June last year.
According to Dr Mangudya, the Central Bank is set to introduce the ZW$50 note to compliment lower denomination banknotes that are already in circulation, saying while this would curb cash shortages and improve transacting convenience; it would not impact negatively on money supply.
The correction by Dr Mangudya could not make him any wiser. A few days ago, Mr Cross was at it again, this time alleging during an online discussion forum convened by Alpha Media Holdings that the Central Bank was printing ZW$1 billion weekly, mainly to buy gold.
Once again, Dr Mangudya had to step in to douse inflationary expectations that had been caused by Mr Cross’ reckless and uninformed statement, amid justifiable concerns that the RBZ was sliding back to the era of Dr Gideon Gono when every little problem had to be resolved by printing money at Fidelity.
Apparently, Mr Cross had gotten his facts mixed up. In the latest case, he was merely trying to restate the obvious whereby the RBZ – through Fidelity Printers and Refiners – pay for 40% of the bullion purchased from the market in local currency (at the prevailing auction rate), while the 60% balance is deposited into the licenced gold buyers’ Foreign Currency Accounts (FCAs). As is the standard practice, the designated foreign currency dealers (including the RBZ) would then buy foreign currency from the market at prevailing auction rates to fund competing needs that require the resource in order to bring into the country essential imports such as drugs, equipment and other raw materials. In the case of the RBZ, the 40% portion retained from Fidelity Printers– the sole buyer of gold at the moment– and from other exporters is also used for this purpose.
While Dr Mangudya had to explain that, “So its net effect is zero on the increase in money supply”, the damage had already been done! Mr Cross must therefore be careful not to squander the goodwill reposed in him by Professor Ncube by undermining the Governor of the RBZ whose term of office was extended by President Emmerson Mnangagwa by another five years in May 2019.
As it is, the MPC chairman already has a lot in his plate, which is brimming with legacy issues, some stretching as far back as the 1970s.
Mr Cross is also doing a great disservice to the very MPC he is sworn to serve. Regrettably, he has co-opted himself as the spokesperson for both the RBZ and its MPC, when there are professionals in the field who are better placed and competent to act as mouthpieces for the two organs.
The damage this is inflicting on the image of the bank and its policies is regrettable. To all intents and purposes, official statements issued by the MPC after concluding its meetings should be sufficient and in keeping with modern trends whereby Central Banks are moving away from the long-standing conviction of the 1990s that monetary policy should be wrapped in mystery.
Anything else beyond these statements should be left to professionals in the field. Just as well, the RBZ has a fully-fledged communications unit which is well-placed to handle its internal and external communications. That alone, demonstrates that the RBZ is conscious of the need to communicate its objectives, its intentions, and the timing of its actions, without unnecessarily causing confusion as is becoming Mr Cross’ hallmark.
When handled properly, effective communication can assist the public in adjusting their expectations accordingly and ensuring that unexpected monetary impulses bear no lasting effects. In a world in which policy-making by surprises has lost its purpose, the RBZ is already structured in a way that makes its communication effective and purposeful.
Beyond the mandatory monetary policy statements, the MPC, through its chairman, had been issuing regular updates, which promotes transparency, accountability, while also reaffirming the RBZ’s firm commitment to a nominal anchor at levels consistent with its monetary policy objectives.
It therefore goes without saying that communication about the bank’s objectives helps nail down the steady state of the economy, the end point to which the economy spontaneously tends aftershocks fade. Communication about strategy also helps explain the way monetary policy behaves outside the steady state, how it responds to shocks and frictions to facilitate the economic convergence back to steady state.
At the same time, communicating about the principles that govern the strategy makes the process of adjustment more rapid and less painful. A growing body of empirical evidence supports the conjecture that transparent quantitative objectives and communication about the strategy reinforces monetary policy.
In the absence of frequent disclosures about policy and the economic situation, market participants may not be in a position to attribute fluctuations in inflation either to exogenous disturbances outside the control of the central bank or to changes in policy intentions. Adverse adjustments in expectations could therefore lead to an increase in inflation today and to a slower and more painful reversal later in the process.
While communication is an ongoing challenge and effective communication will always be characterized by a high degree of flexibility and adaptability in order to respond swiftly to a rapidly changing economic environment, Mr Cross’ brash style is a NO, NO. Admittedly, he has his strengths, one of which being his ability to speak his mind, and writing thought-provoking articles in the mainstream media. There is, however, a world of difference between his skillset and what is required to communicate policy at the level of the Central Bank.
Mr Cross can still make himself relevant by sticking to his active participation in the MPC’s affairs while avoiding making public statements on the Committee’s deliberations because that is outside his competences.
The sages say silence cannot be misquoted. For the sake of stability in our markets, Mr Cross must hold his peace!
Dr Tim Rainhard has studied the work of some of the international financial institutions in developing countries. He is an economist with extensive knowledge on Africa’s financial systems. He can be contacted at [email protected]
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