Home » Industry » Mangudya Calls for Economic Discipline

Maiden statements by heads of states the world over are religiously followed by economic agents from within and outside borders with much enthusiasm.

The reason for such passion is that in most cases they predict future policies that a particular president would pursue in his or her term of office.

Such statements are not only confined to heads of states but also to key cabinet offices particularly such as the minister of finance and central bank governors. One of the most acclaimed maiden statements of all time is that by Winston Churchill.

On May 10, 1940, Winston Churchill became Prime Minister. When he met his Cabinet on May 13, he told them “I have nothing to offer but blood, toil, tears and sweat.”

He repeated that phrase later in the day when he asked the House of Commons for a vote of confidence in his new all-party government.

The response of Labour was heart-warming the Conservative reaction was lukewarm. They still really wanted Neville Chamberlain. For the first time, the people had hope but Churchill commented to General Ismay: “Poor people, poor people. They trust me, and I can give them nothing but disaster for quite a long time.”

Churchill’s maiden statement simply highlights two issues. The first issue signals that Britain at that time was faced by a huge challenge ranging from political, economic to social.

Secondly, the statement also revealed his enthusiasm, determination, and optimism towards turning the fortunes of his citizens.

Likewise on May 7, 2014, the newly appointed governor of Reserve Bank Dr John Mangudya presented his maiden statement which most viewed as likely to set the tone for his five-year tenure at the office.

The governor’s statements is similar to Churchill as he acknowledged the huge challenges that the economy is facing which are low and declining aggregate demand, deteriorating balance of payments position, banking sector vulnerabilities and low capacity utilisation.

“The economy is weaker and the financial system is depressed,” is an extract from the governor.

In addition, he also publicly admitted that the central bank had no tools at the moment to influence the economy directly.

With this in mind how will the central bank perform its role and will it be successful?

Furthermore, his calls for discipline repeatedly in his statement does it mean it is one of his core areas?

If so what is the fate for bankers, will he be harsh compared to the preceding regime?

Despite the lack of adequate tools by the central bank to jump start the economy, the spirit behind the new governor’s statement may assist in facilitating the recovery in the economy.

His call for being “courageous and skilful in managing the situation at hand,” may be the game changer. This according to the governor entails relationship management, policy aice and putting in place national beneficial financial structures to increase liquidity.

Such a view is critical as policies need to be formulated to meet prevailing challenges. Thus focus on relationship management is essential especially in re-engaging multi-lateral institutions considering the debt overhang and liquidity crunch in the economy.

Further to this relationship management entails the central bank’s rapport with individual banking institutions. This area is strategically important as divorce between the two may possibly derail implementation of policies that the central bank would have formulated.

Literally, the role of the reserve bank will be more of moral suasion from this front. Under such a circumstance the formulation and implementation of policies after recommendations by the central bank will determine the success or failure of the economy.

Turning to discipline, the governor highlighted this as the “greatest panacea” for Zimbabwe’s challenges.

He called for discipline in efficient utilisation of resources, living within one’s means, focussing on production first before consumption, need to work hard and harmonising the need to promote indigenisation and the need for foreign direct investment.

From this perspective, the governor may possibly have come to the realisation that revival in the economy does not only come from fixing the banking sector alone. Rather all other sectors and players in the economy have a greater part to play. In these trying times, such a call is suitable for the current environment thus elimination of corruption would assist in eliminating haphazard use of resources particularly in minerals.

Inferring from his first communication, it appears the central banks’ call for harmonising indigenisation and the need for foreign direct investment and synchronising the two, remains significant.

This was the same attitude by the out-going governor.

Such a statement aligns with the recent calls by the government that the indigenisation policy was flexible.

This single voice by the government, ministry of finance and now the central bank is the first step towards economic emancipation. However, there is greater need for implementation of such and formulation of other business friendly policies as a way of boosting investment by both potential domestic and foreign investors for sustainable results.

Assuming the calls for discipline are pursued, the banking sector is likely to benefit particularly from the indigenisation front.

A flexible policy as the one the governor is aocating may result in foreign investors increasing their stake in most indigenous banks. This is convenient considering the scarcity of capital locally.

Virtually all industries have of late been starved of long term funding due to the liquidity crisis which has been elevating within the banking sector.

Whilst banking institutions might find solace from the plea to harmonise the need for indigenisation and foreign direct investment, there is another flip side of the same coin.

This side refers to the causes of the liquidity crisis where some circles attribute indiscipline by banking institutions as among the major reasons.

Clearly from the latest statement by the central bank, issues to deal with insider loans, abuse of depositors’ funds come to the picture.

Whilst the extent to which discipline will be instituted may not be determined currently, banking institutions may need to take seriously the request by the new central bank chief.

This is especially important as the central bank when it comes to supervisions may not be a toothless dog as it is when it comes to instruments of stimulating the economy such as interest rates and money supply.

On-going measures to amend the Banking Act to include enforcement of criminal liability and elimination of insider loans will go a long way. Thus the banking institutions should treat this declaration with great reverence.

Continuing talks concerning recapitalisation of the Reserve Bank, resumption of interbank and lender of last resort are envisaged to take longer than expected.

Overall, only time will tell on whether the maiden statement by the new governor is anything to go by.

Nevertheless, what is clear is that the collusion of minds by all stakeholders in the economy will significantly facilitate revival of the ailing economy.

In addition, discipline by banking institutions is inevitable.

Source : The Herald