Persistence Gwanyanya
As the Reserve Bank of Zimbabwe (RBZ) continues to fixate on attaining durable stability, the central bank Governor, Dr John Mangudya, announced a conservative monetary policy statement on Thursday last week.
Commendably, the central bank has maintained a positive real interest rate policy despite lowering the bank rate and medium-term bank accommodation (MBA) to 150 percent and 75 percent from 200 percent and 100 percent, respectively.
The notion of positive real interest is based on the projected average Zimbabwe dollar annual inflation of 75 to 105 percent for 2023, which is lower than the new interest rates.
Clearly, given the highlighted thought process of interest rate determination, the rigour of the interest rate decision by the monetary policy authorities is best assessed through the veracity of inflation projections.
The accurateness of inflation projections by RBZ in the last six months gives us some measure of confidence about the achievability of the inflation projections.
Importantly, disinflation measures put in place by both RBZ and Treasury seem to be bearing fruit.
The continued implementation of the value-for-money drive by Treasury is crucial in managing the liquidity pressures from the fiscus.
The results of the value-for-money audits so far are encouraging, despite the teething problems, which saw some delays in payments on account of compliance issues.
True, contractors and suppliers have been bleeding the Government mainly through overpricing of goods and services.
The idea of a positive real interest rate policy is plausible, being a breakaway from the past regime of negative real interest policy.
Importantly, the dual interest rate policy takes cognisance of the need to support the productive sectors of the economy, as well as small and medium enterprises, and individuals, who shall continue to enjoy a concessionary interest rate of 75 percent.
However, worryingly, we observed that some banks were finding it difficult to comply with RBZ’s interest rate policy, citing high cost of funds.
With the increase of the MBA facility to $20 billion from $10 billion, there is really no excuse for non-compliance by the banks.
In view of the declining inflation, continuing with high interest rates will only hurt production, individuals, small and medium-sized businesses, as well as large well-established businesses, which have either paid off or converted their Zimbabwe dollar loans to foreign currency.
Arguably, the instability we experienced was, in the first place, driven by these large and well-established entities since they are the only ones with the muscle to spin the market out of control.
Importantly, insisting on a high interest rate was going to drive up forex lending and expose the economy to high risk of costly redollarisation.
Like in the past, excessive foreign currency credit creation makes it difficult to sustain a multiple currency system as foreign currency mutates into some pseudo currency, with limited capacity to make external payments.
This is why RBZ had to extend the statutory reserve requirement for foreign currency deposits on September 1, 2022.
As at December 30, 2022, foreign currency statutory reserves amounted to US$70 million, ZAR45 million; BWP0,3 million and €0,2 million. Since 2020, inflation management was anchored in monetary targeting.
This entails setting a quarterly reserve money growth target. Given the high levels of inflation, the RBZ Monetary Policy Committee pursued an aggressive tightening approach typified by a gradual reduction of the reserve money target from 25 percent in 2020 to zero percent currently.
Resultantly, it is becoming extremely difficult to continue tightening as more than 90 percent of reserve money is now statutory reserve.
The excess reserve, which is the banks’ Zimbabwe dollar balance at RBZ, has been maintained at around $100 million for a long time.
This is a significant reduction from a peak of $14 billion in 2020.
Effectiveness of monetary tightening derives from the ability to reduce excess reserves.
Now, given the low levels of excess reserves, there is no more scope to continue tightening.
In fact, further tightening results in an increase in reserve money.
As such, in the last half of 2022, we started to experience a delink of reserve money-inflation-exchange rate relationship.
This means RBZ can no longer continue to heavily rely on monetary targeting but other monetary policy anchors.
Also, reliance on non-negotiable certificates of deposits (NNCD) to mop up liquidity is not very effective as this tool mops up liquidity at banks but not customer level.
As long as depositors still have access to their money, they still have power to drive inflation and currency depreciation.
It is, therefore, unsurprising that the RBZ introduced gold coins in July 2022.
Being a retail investment product, gold coins have proved to be effective in mopping up liquidity at customer level.
With a vesting period of six months, gold coins can sterilise liquidity for a longer period.
Interestingly, no one has redeemed their gold coins on the first maturity on January 25, 2023.
This could be due to the firming up of gold coin prices.
At their introduction gold coin prices was around US$1 700/ounce but are now trading at around US$2 000/ounce, representing more than 18 percent price increase.
Reflecting their effectiveness, when the gold coins were introduced the exchange rate, which was highly expected to depreciate to US$1: $1 000 in a month actually strengthened to US$1: $750. Whilst this was largely attributable to the announcement effect of the gold coins, the attractiveness of the product drives its, and therefore, Zimbabwe dollar demand, which is key to managing the volatility of the local currency.
As at January 13, 2023, RBZ had sold a total of 25 188 gold coins for $20 billion.
Unsurprisingly, the Central Bank has committed to continue with gold coins, which will also complement the Foreign Currency Auction system. The auction has mainly been catering for the import requirements of the market. Gold coins provide an investment avenue outside the import requirements of the market for mainly value preservation.
RBZ reports that as at January 13, 16 percent of the gold coins were sold to individuals.
The Central Bank is actually enhancing the gold coins by introducing small denominations to cater for the varying needs of the market.
Out of the total gold coins sold, 38 percent were smaller denominations of less than an ounce. The RBZ also reiterated its commitment to enhance functionality of the Foreign Currency Auction System, which is commendable.
The auction system remains a sterilised intervention to contain inflation.
Though still above international best practice, RBZ committed to settle auction allocations in 14 days.
This happens at a time when the RBZ has settled all outstanding auction allocation for 2022.
Importantly, the idea of a wholesale market where banks also get allocations from RBZ to on sale to their customer is plausible as it gives boost to the Willing Buyer Willing Seller (WBWS) market.
This, it is hoped, will help the banks to unlock to US$800 – US$1,4 billion foreign currency deposits banks have been sitting on at any given time.
However, there is need for mechanism to minimise abuse of the wholesale foreign currency facility by the banks.
With the level of foreign currency generation of Zimbabwe, it should be possible to achieve currency stability.
Foreign currency inflows continue to increase, reaching US$11,6billion in December 2023 from US$9,9 billion the previous year.
The increase in exports, largely on account of firming global commodity prices gives us confidence that the surrender funds, which have mainly been supporting the auction system are going to increase.
In 2022, exports increased to US$7,4billion from about US$6billion the previous year.
Surrender funds were the main source of funding for the US$1,1billion foreign currency auction allocations in 2022.
Now, it remains debatable how RBZ will manage to meet the foreign currency requirements of the auction system following the reduction of export and domestic surrender ratios from 40 and 20 to 25 and 15 percent, respectively.
The view of RBZ is that by standardising the surrender ratios and removing exemptions to everyone including companies listed on the Victoria Falls Stocks exchange, the reduction in the surrender ratios has minimum effect on surrender proceeds. It is important to commend RBZ for answering calls from the market on policy exemptions.
Too many policy exemptions are not good for the economy.
Actually, review of surrender ratios come as a relief to exporters and those transacting in foreign currency domestically.
This is seen as an incentive to investment in Zimbabwe. We know of a mining giant that was attracted by this incentive to invest billions of dollars in the economy.
All these measures are expected to restore inflation and currency stability, which was shaken in December 2022 due to the effect of the holiday and some liquidity injection as Treasury was winding up its books.
The progress on inflation flight so far gives us a measure of confidence that this dragon will soon be defeated.
Reflecting the effectiveness of disinflation measures implemented by the fiscal and monetary authorities, annual inflation, which has been on a downward trajectory since September 2022, closed the year 243,8 percent before further declining to 229,8 percent.
The month on month inflation fell from 30,7 percent in June 2022 to 2,4 percent in December 2022 before further declining to 1,1 percent in January 2023.
Given the increased dollarisation in the economy, which is estimated between 65 and 76 percent by institutions such as the RBZ, Zimstat and the Confederation of Zimbabwe Industries (CZI), its commendable that going forward, the country should report blended inflation as the official inflation.
Blended inflation closed the year at 105,5 percent and RBZ expects it to close 2023 at between 10-30 percent.
Given the that inflation in Zimbabwe has largely been a monetary phenomenon, it’s important to subject the inflation projection to test.
It appears many analysts are still concerned about the growth in money supply.
However, while broad money supply is said to have increased by 391,88 percent, it largely reflects the impact of exchange rate depreciation and to an extent accounting treatment of Special Drawing Rights (SDR).
Foreign currency deposits increased by 530,07 percent contributing 234,96 percentage points to the annual growth in money supply.
Underlying growth in money supply were increases of $391,69 billion (470,65 percent) and $865,52 billion (388,25 percent) net claims to government and credit to the private sector respectively.
Within the net claims to government is $137,31 billion due to accounting for SDRs.
Whilst the measures from monetary policy gives us confidence that stability will be well managed in 2023, there are some downside risks. Most analyst are worrying about the general election scheduled for later this year.
However, it appears the Government has resisted the pressure for populist policies that normally characterise an election period.
It was not expected for the Government to consent to tightening of the monetary policy ahead of elections.
We thought the hike in interest rates to 200 percent in June 2022 was going to be largely resisted by the politicians especially given that it was done towards the agriculture season, but nothing like that happened.
The calmness of the current environment gives us confidence that this time will be different. The promising agriculture season supports the hopes of improved economic prospects this year.
That is why the RBZ is confident about the achievability of economic growth of 3,8 percent in 2023.
More importantly, hopes of stability are pinned on improved coordination of Treasury and RBZ on liquidity management.
Unlike the belief held by some, our main problem is not money supply growth but liquidity management.
Now the beauty about liquidity management is that it can be managed.
Persistence Gwanyanya is a member of the RBZ Monetary Policy Committee and Futurist of Bullion Group. WhatsApp: +263 773 030 691
