We haven’t done well on market discipline – Mangudya

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Reserve Bank of Zimbabwe (RBZ) Governor and MPC chairperson, Dr John Mangudya

The problems at hand are endogenous to the collective behavior of economic agents.

HARARE – The role of market forces in shaping economic outcomes cannot be underestimated. Over the years, Zimbabwe has been gripped with financial instability and as a key policy concern, the central bank moved to introduce the Reuters-based foreign currency auction system to bring sanity to the forex market. This is in addition to other measures that include the separation of FCA accounts and RTGS accounts back in 2018.

Looking back at the years, Zimbabwe has been haunted by huge fiscal indiscipline where treasury bills for instance had become a de-facto currency within the economy, wasteful expenditure by the government, and unsustainable subsidiaries on key goods.

While the government says these have been ‘properly’ managed, there are concerns over the lack of market discipline dominating the economy.

Market discipline defined

Market discipline is the onus on banks, financial institutions, sovereigns, and other major players in the financial industry to conduct business while considering the risks to their stakeholders. Market discipline is a market-based promotion of the transparency and disclosure of the risks associated with a business or entity. It works in concert with regulatory systems to increase the safety and soundness of the market.

Speaking during the “Post-Mortem Monetary Policy” zoom session hosted by the Dailynews today, Reserve Bank of Zimbabwe (RBZ) Governor, Dr. John Mangudya blamed business players for fuelling inflation and promoting higher parallel market exchange rates.

According to Mangudya, this is happening where retailers are selling their products at higher rates than they bid on the forex market.

“Others want to make money on the exchange gains and you are pushing the buck on the consumers,” said Mangudya while admitting that market discipline and self-discipline are outside the central bank’s control.

What’s been suggested

It is important to note that a shift toward a market led-led system is what the government has been encouraged to do on many occasions to ensure stability amid inflationary tensions. Clearly, for the government that finds comfort in total control as opposed to liberal approaches, this is a risky route to take.

However, occasional episodes of financial instability may well be part of the price to pay for the undoubted long-run economic benefits of a free-market economic system, some would call it creative destruction.

Such a level of market liberalisation, however, does not currently exist in Zimbabwe. As already seen, RBZ in December 2020 announced the intention to close bank accounts of business entities that are pricing using exchange rates outside the existing auction rate. This is a price control approach.

The government often blames errant business operations and rent-seeking behavior for the economic mess. In the middle of that war, there are bleeding consumers.

Echoing, the Governor’s statement, permanent secretary in the Ministry of Finance and Economic Development, George Guvamatanga said there is no justification for the wanton increases in prices experienced over the past two months while castigating major retailers for playing a role.

He hinted that government will have no other option but to intervene, an act that can create further confusion within the markets.

“The government is very much concerned with the current level of market indiscipline we are facing in the economy. In most cases this leads to market failure and the government is forced to intervene,” said Guvamatanga.

What needs to be done

Acknowledging that market discipline is essential in ensuring financial stability, there are a number of pre-requisites that have to be met. One of those is having sufficient information. Zimbabwe’s economic system is arguably characterised by a chronic tendency to under-supply information relative to what is necessary for effective financial discipline.

The government has been at the centre of creating confusion. A number of key policies have been introduced through the “rumour – denial – implement” process. The foreign currency auction system is marred by allegations of rate manipulation by the central bank while the ban in trading of fungible shares on the local bourse is among one considerable acts of government curtailing open market operations.

Self-indiscipline is not so much the real problem. The situation is a result of correlated issues stemming from policy formulation, implementation, and practice.

For the central bank and peers in the ministry of finance to think that they have achieved on their part referencing monetary and fiscal stability, it becomes misleading. The problems at hand are endogenous to the collective behavior of economic agents.

The indifferences are a clear sign of confidence deficit in government policies by the economic players and that is what should be addressed.

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