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Unpacking the 2019 Mid-Term Monetary Policy Statement

By Persistence Gwanyanya
The Mid-Term Monetary Policy Statement (MPS) came a time when the country recently introduced its sovereign currency, the Zimbabwe dollar, which effectively reactivated the monetary policy leg of the economic management tool box. Importantly, the policy statement was timely as it came at a time when the monetary situation was rapidly deteriorating due to the lagged effects of monetisation of deficits, which pushed us out of dolarisation.

Given the country’s primary policy focus to achieve price stability, the monetary policy statement is seen as supporting the fiscal policy measures, from the recently announced Mid-Term Fiscal Policy Review and Supplementary Budget. The return to a mono-concurrency regime has conferred more power to Reserve Bank of Zimbabwe (RBZ), of course now through the recently appointed Monetary Policy Committee (MPC), to manage money supply growth through monetary targeting, which is necessary to anchor both price and exchange rate stability. The broad money supply target has remained at maximum of 10 percent by year end, to manage inflation, which shot up to a new record high of 176 percent in June 2019, before Treasury suspended the publication of annual inflation.

Fiscal consolidation efforts, which saw continuation of surplus at $159,8 million for the month of June, will be supported by RBZ’s commitment to ensure Treasury adhered to zero recourse to central bank window for support as well as the strategy to deal with the monetary impact of maturing Treasury Bills (TBs) and savings bonds. Because of the potential impact of these debt instruments on liquidity, RBZ had to introduce USD-base savings bonds, which is an innovative financial product to incentivise USD savings and increase the flow and accessibility of foreign currency in the formal system. These bonds have the following features; attract interest rate of 7,5 percent per annum, are tax exempted, have liquid asset status and acceptable for collateral for overnight accommodation by RBZ, which are attractive to potential investors.

As a way of managing liquidity to set achieve monetary targets, RBZ shall be increasingly relying on the Open Market Operation (OMO), mainly through the use TBs to inject or mop up liquidity. We already know that this year we are targeting a budget deficit of about $4 billion, which is approximately 4 percent of GDP, and thus acceptable, so measures to ensure that we live within budget are necessary to manage inflation. With the use OMO instruments, RBZ shall ensure the growth in reserve money supply growth of not more than 10 percent is achieved by year end. This is mainly important to deal with the inflation dragon, which as I have indicated early, is getting out of control.

It is worrying that the traction on currency and price stability is now highly threatened by growth in cash premiums, which have gone up to 50 percent as cash shortages intensify. For proper functionality, an economy requires cash in circulation of between 10-15 percent of the broad money supply. Currently, the cash in circulation is significantly lower than the required amount of $1,5 billion to $2,25 billion at around $600 million meaning that RBZ has to gradually increase notes and coins in circulation.

Hopefully the new Zim dollar with higher denominations, which was promised by the President, is going to be introduced early to deal with this issue of cash shortages. The growth in cash premiums is quite disturbing as it continues to erode the value of electronic money, which most of us earn, further worsening the plight of the already pressed ordinary men.

As a measure to influence growth, RBZ intervened to boost long-term credit, which is currently very low as banks are derisking, typified by the rapidly falling loan-deposit ratio, which stood at 36,49 percent as at June 2019. RBZ sought to incentivise long-term lending through a facility, which benefits banks with loan maturities of above two year by allowing them to use these facilities as collateral for borrowing from RBZ as a way to break short-termism in the credit cycle as well as to promote long term savings. This will undoubtedly prime the economy for growth after stability.

It’s always important for RBZ to guide the market towards its desired and expected path especially with regards to inflation and interest rates, for achievement of its monetary targets. This is more important now when Treasury has suspended the publication of annual inflation, which is normally used for projection purposes. As such the increase in the bank rate from 50 to 70 percent is unsurprising as it reflects the desired low level of both inflation and exchange rate.

Following the recent monetary reforms, which saw the depreciation of the local currency by more than 10 times as well as rising inflation, which hit 176 percent in June 2019, it was necessary to revise the minimum capital requirement of banks to reduce banking sector vulnerabilities and minimise the risk of bank failure. This has seen an upward revision of core capital of all tier 1 banks to $200 million from US$/RTGs100million by 2020, whilst capital requirement for tier 2 and 3 banks has remained unchanged.

It’s important that RBZ recognises the importance of dealing with distortions caused by long decade of mispricing and across board subsidising of many goods and services mainly fuel, utilities — electricity and water — and, importantly currency. This means the economy may have to adjust its pricing models, with at least cost recovery prices for utilities, Government levies and charges, so we can only expect things to get worse before getting better.

However, what is important is to expedite all the efforts to rebuild and ensure that our people don’t lose hope. As also acknowledged by RBZ communication will be key to get the required buy in from our people so that they rally behind the current efforts.

I always want to remind the people that the problems of Zimbabwe cannot be sorted overnight as they are long term and structural in nature, so we may need to preserve.

All what this says is we carry a significant burden of the past.

But what’s more important for now is whether we are in the right direction or not. Its conforming that we getting the economy back on the rail, with current emphasis being stability. It’s difficult to talk about growth without stability. Who will invest in an unstable economy really? This explains why all focus for now should be on stability. We need to deal with the issues of utilities especially electricity, which has become a major driver of price instability. The traction registered on balance of payment so far, with the achievement of a surplus in the first quarter of 2019, is now under serious threat from mainly reduced gold production on account of fuel and electricity problems that affect mainly artisanal and small gold miners, who are now the major contributors of gold production.

Let’s me end by expressing heartfelt condolences on the passing on of one of the founding fathers of Zimbabwe and a gallant son of the soil, the former President of the Republic of Zimbabwe, Cde Robert Gabriel Mugabe.

Go well Gushungo!!

May your soul rest in eternal peace.

Persistence Gwanyanya is an economist, banker and trade finance specialist who also founded the Bullion Group.

Source :

The Herald

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