RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya yesterday told Parliament that the real time gross settlement (RTGS) dollar will likely be devalued further by the time the tobacco auction floors open next week.
Addressing the Public Accounts Committee (PAC) and the Parliamentary Portfolio Committee on Finance, Mangudya said the economic environment was not conducive for the huge salary increments being demanded by workers, which he said would destroy companies and push the country into recession.
PAC chairperson Tendai Biti asked him to explain if the economy could take salary increases given the devaluation of the RTGS dollar to the United States dollar.
“When you put in the 2% transaction tax, you were not accounting for inevitable wage increases that are coming because unions are now demanding a wage increase of $3 000. At what rate will the US dollar finally settle in the market because the 2,5% is not selling and last week you even gave gold producers a rate of 3,5%,” Biti said.
Public sector workers have been demanding a minimum salary of $3 000 from around $400 after government abandoned its 1:1 peg of the local currency and the US$ last month, the introduction of a 2% tax in October last year and the separation of local accounts and the US$ accounts which led to sharp price hikes of goods, including fuel, bread and medicines, have also made matters worse for workers.
But Mangudya said such high wage increments would push the country into recession.
“I see shops now trying to promote their products and in my Monetary Policy Statement (MPS), I stated that I was more worried about going into recession and when that happens, it will be very difficult to get out of it and an example is that you were not seeing Mazoe Orange Crush, but nowadays you see it,” Mangudya said.
“I do not see the economy having capacity to carry huge wage increases. We need a balance. I am not against salary increases, but we need to consider the quantum where we need to be reasonable because at the end of the day, we might end up in a recession where we are not going to be able to get out,” he said.
The RBZ chief said currently wage inflation was dangerous for the country, adding that his major concern was that the demand for goods and services had gone down.
“Because of that reason there is no capacity for this economy to provide higher salaries. There is no capacity for companies or firms to be able to increase their prices. Right now there is resistance in terms of purchases. I now hear that there will be promotions for cement, for example,” he said.
The governor said it will be easier to come up with the right levels of wage increments when prices stabilise.
“We think that inflation should be the one used to determine wages and, therefore, it means that going forward, we need to look at the right levels of inflation. We need to attack that animal called inflation so that at the end of the day when people talk about wage increases they are linked to inflation,” he said, adding that in October, the inflation base was at 20%, but that the figures will be lower by 15% to 10% by year end.
Mangudya also denied manipulating the exchange rate, which he said was expected to change when the tobacco selling season starts on March 20. Tobacco is Zimbabwe’s second-largest foreign currency earner after mining.
“We believe that before or on that date the rate will have reached its equilibrium. We don’t believe it will still be 2,5 (to the US$),” Mangudya said.
Analysts think the central bank would move the rate to around 3,5 to the US$ after the governor recently pegged a similar rate for miners, which would still be lower than the parallel market rate of 3,8.
Mangudya was also grilled over the loss of value of pensions.
Shurugwi South MP Edmond Mkaratigwa (Zanu PF) asked: “On preservation of value in relation to pensioners, I feel that you have preserved pension and insurance houses at the expense of pensioners because when we dollarised in 2009 up to February 2019 insurance companies were converting funds into assets on a one to one basis, but now bank balances are in RTGS divided by 2,5,and we are losing at least more than 60% of value, whereas insurance companies if they bought bricks for investment in buildings they preserved that 1:1 value.”
Mangudya denied that the exchange rate of 2,5% was responsible for eroding value, insisting that pensions were being eroded by inflation.
“Inflation in Zimbabwe has been going up because of the pass through effects of the exchange rates. By opening up the economy we do believe that the rate of exchange will remain in bands that are acceptable, which means that we can now tame inflation. All inflation is caused by increased money supply. We will preserve value for pensioners and all Zimbabweans by ensuring that inflation does not go through the roof,” he said.
The governor said the best way of managing inflation was to provide insurance companies and pensioners with inflation-linked products.
“Inflation is the one that erodes value and it means that we should deal with inflation. Pension funds need to preserve value for money by having inflation-linked products and increase the money they pay to pensioners on a monthly basis,” Mangudya said.
But MPs felt that pensioners were robbed and that Mangudya must come up with concrete plans to preserve value of pensions. Mangudya noted that failure to preserve foreign currency was due to Zimbabwe not producing to earn forex.
“All I am saying is that we need to understand the macro-economic context, and what we did with the MPS is that we started at 2,5 rate and we need to reduce inflation. The 1:1 value was being consumed by high inflation and now we are trying to ensure the economy stabilises. The willing buyer, willing seller policy will continue to be there and we are saying we are not breathing more money into the virtual currency. As we go to September and October inflation will go down and by the end of the year it will be lower by 15% to 18%,” Mangudya said.
On the exchange rate, he said very soon the country will come to equilibrium as inflation stabilised.