By Zvikomborero Sibanda
The Reserve Bank of Zimbabwe (RBZ) usually announces its monetary policy statement (MPS) in February of every year. A monetary policy is a list of actions to be taken by a country’s central bank to influence how much money is in the economy and how much it costs to borrow. It is implemented through various tools including inter alia the adjustment of interest rates, trading of government securities, and altering the amount of money circulating in the economy. This policy’s primary objectives are to manage inflation or unemployment and maintain currency exchange rates and financial market stability.
As such, the success of a central bank is generally measured by the prevailing level of price inflation and currency performance. The latest statistics from Zimbabwe National Statistics Agency (ZimStat) show prices massively cooling off in January 2023. In annual terms (January 2022-January 2023), the inflation rate as measured by the all-items Consumer Price Index (CPI) came in at 229.8% relative to 60.61% recorded in January 2022. The January 2023 annual inflation outturn is 14 percentage points lower than the 243.8% realized in December 2022 and the lowest in seven (7) months. ZimStat statistics also showed that from a month-on-month perspective, the price inflation rate in January 2023 was 1.1% shedding 1.3 percentage points on the December 2022 rate of 2.4%.
ZimStat time series data shows that the monthly inflation rate for January 2023 is the lowest outturn since September 2018. In that September, it was recorded at 0.92% before it however jumped to 16.44% in the following month when austerity measures such as the 2% tax were introduced. After mounting by 14.31% on average in the first half of 2022 from 5.34% in January to 30.7% in June, the monthly inflation rate is falling ever since save for December. It decelerated to 25.6% in July and had now closed January 2023 at 1.1%. Buoyed by this increased moderation of price growth, authorities through the 2023 national budget statement are projecting monthly inflation to average 1-3%.
The late Milton Friedman who popularized the theory of monetarism posited that the antidote to price inflation was higher interest rates, which in turn reduces the money supply. Consequently, prices will fall as people would have less money to spend. In short, Friedman argued that inflation is always and everywhere a monetary phenomenon. As such, authorities should not rapidly increase the money supply as this is counterproductive by fuelling inflation. There is a wide consensus that the increase should be gradual to circumvent higher unemployment rates. Theoretically, this would help establish a Goldilocks economy -a period of stable economic growth where inflation remains low and RBZ does not feel the need to increase interest rates.
From the foregoing, Zimbabwean experiences surely validate the monetary theory. Excessive money supply growth is the major culprit causing ZWL deterioration and its resultant pass-through effect on inflation. For instance, RBZ statistics show a staggering reserve money supply growth of 170%, 113%, and 38% in 2019, 2020, and 2021 respectively. During this 2019-2021 period, ZWL lost about 10.7% of its value on average per month. In response, both annual and monthly price inflation grew at an unsustainable rate averaging 339.3% and 11.6% per month respectively.
As for 2022, annual inflation raged havoc in the first half mounting from 60.61% in January to close June at 191.7% as monthly prices upscaled at an unsustainable 14.31% on average. According to its 2023 Monetary Policy Statement (MPS), it is RBZ’s increased financial tightening that helped cool down inflation in the second half. For instance, it revealed that both local and foreign currency statutory reserves constituted 90% of total reserve money as of the end of December 2022. As such, since these statutory reserves are locked up in RBZ vaults and therefore unavailable for on-lending by banks, their increase helped reduce the money supply in circulation. The MPS also indicated that excess bank reserves –ZWL balances at RBZ– declined from around ZW$14 billion in 2021 to less than ZW$100 million by end-December 2022 thus signifying further tightening of liquidity conditions.
The foregoing highlights from the 2023 MPS confirm my view that the Russia-Ukraine war was not the significant driver of exchange rate and price volatility in Zimbabwe. Massive ZWL depreciation since its re-introduction in 2019 and subsequent accelerated price growth is highly linked to the increased money supply. To curb these volatilities, this column has been calling for tight monetary targeting to attain sustainable ZWL liquidity growth in the system.
Taking the 2023 MPS at face value, these are the actions the Bank confirms to have taken in order to arrest price instability. This is enough evidence that going forward RBZ should maintain sustainable levels of ZWL liquidity in the system to help achieve a Goldilocks economy. Sustainable liquidity growth is the one that keeps parallel market exchange rate premia within conventional threshold levels of between 0-20%. In simple terms, money supply growth in the economy should move in tandem with the rate of growth of economic activity in the real sector.
Nevertheless, as I alluded to a fortnight ago, 2023 is going to be a challenging year for monetary policymakers. The desired Goldilocks economy only comes when fiscal and monetary policies are complementary. This year, Treasury is expected to experience an unsustainable budget overrun due to the upcoming harmonized elections. Election seasons are highly distortionary as political pressures increase the possibility of fiscal policy slippages and reversals. Studies have shown that incumbent governments facing re-election tend to display dovish spending tendencies as political goals are prioritized at the expense of the long-term health of the general economy and the welfare of citizens.
More so, apart from harmonized elections, Zimbabwe will likely continue to face prolonged load-shedding hours for most of 2023 as the usable water level in Kariba Dam remains significantly low and forex shortages will constrain production at existing old thermal stations which frequently breakdown. As such, power shortages at a time prices of electricity substitutes like fuel are expected to remain elevated will balloon production costs and subdued activity in the real sector thereby worsening the already high cost of living. As the West now starts considering supplying Ukraine with heavy and advanced weapons, the Russia-Ukraine war will likely shift to a whole new level with serious global risk. The disruptions to supply chains induced by the war and ensuing global inflation exert disproportionate impacts on developing nations like Zimbabwe which are perennial net importers. In addition, there is a possibility of a severe trade war between the US and China as the former had already instituted rules prohibiting the sale of advanced semiconductor chips to Chinese customers.
The 2023 environment poses a monetary policy-making dilemma as the need for a contractionary stance to cool inflationary pressures may be overshadowed by the expansionary fiscal stance driven by election-linked spending. Cognizant of this, it is likely going to be a daunting task for RBZ to keep the average monthly inflation rate at 1.5%. Therefore, next week this column will analyze if the policy actions proposed in the 2023 monetary policy are adequate to boost ZWL appeal and arrest macroeconomic instability.
Zvikomborero Sibanda is an economic analyst and an astute researcher. He writes in his personal capacity. He can be contacted via email:
br**********@gm***.com
Twitter: @bravon96
