Zvikomborero Sibanda
Reserve Bank of Zimbabwe’s (RBZ) Monetary Policy Committee (MPC) convened an ad hoc meeting on the 6th of June 2023 amid a deepening currency crisis. The MPC meeting comes after the Treasury had earlier announced a cocktail of policy measures to stabilize the local currency and prices.
The Zimbabwe dollar (ZWL) which was re-introduced in 2019 following a decade of full dollarization is again on the verge of collapse and total market rejection. The local unit of exchange which was trading at an average ZWL/USD 3600 in the alternative exchange markets as of the end of May 2023 has lost a staggering 40% of its value to ZWL/USD 6 000 in only the first 8 days of June 2023. In year-to-date (YTD) terms, the ZWL is down 85% in parallel markets.
A granular analysis shows that largely driving ZWL price inflation haywire is the unsustainable growth of liquidity in the economy. The RBZ was massively engaging in quasi-fiscal activities (QFOs), buying forex from exporters. Also, the Treasury is overseeing elevated spending, for instance, paying for ongoing infrastructure projects, supporting the 2023 Agric marketing season purchasing grains from farmers through the Grain Marketing Board (GMB), salary increments for public servants, and electioneering pressure from the ruling political party. There is a consensus among monetary economists that inflation is always and everywhere a monetary phenomenon. This is because too much money in circulation in an economy creates an imbalance between aggregate demand and aggregate supply of goods & services. Thus, forcing prices to keep rising, a case being faced by Zimbabwe.
The figure shows an excessive growth of the ZWL component of high-powered money also known as central bank or reserve money (M0). Latest RBZ statistics show this monetary aggregate expanding at an unsustainable rate averaging 12% per month between October 2022 and April 2023. Generally, M0 holds the topmost position in monetary policymaking. Since it is injected at the discretion of a central bank and includes currency in circulation with the public, M0 decides the level of liquidity and price level in the economy. As such, prudent management of M0 is thus very important to manage liquidity and inflation.
Apart from excess liquidity, local currency, and ZWL price instability are partly fuelled by increased velocity of money. When an economy is going through rising inflation, people tend to spend money at a faster rate increasing the velocity of circulation of money in the economy (Total Money Use = Money Supply × Velocity of Circulation). In addition, weak exchange rate management framework, adverse inflation expectations, structural rigidities like perpetual load-shedding, spillover effects from the Russia-Ukraine war, and rent-seeking are also exerting upward pressure on prices.
The currency conundrum is disproportionately affecting ordinary citizens largely earning in ZWLs as shops are forced to adjust ZWL prices daily yet workers’ salaries are sticky. Officially, inflation (blended rate, that is, a weighted average of ZWL and USD) is estimated at 86.5% as of May 2023 while independent estimates show ZWL inflation at over 700%. This increased volatility of ZWL prices will greatly subdue consumer demand which is generally considered one of the key drivers of national output growth (GDP). Volatile prices are also affecting shop restocking, company profitability, and the predictability of business – the ability to predict forthcoming events and adapt operations to them. A lack thereof inhibits great business market fit and quality customer service while breeding waste and inefficiencies, a foundation of unsustainable enterprises.
To clamp the increased ZWL volatility and contain galloping inflation, the MPC has resolved to introduce a wholesale forex auction where RBZ will be selling forex at a market-determined exchange rate through banks and the banks shall, in turn, sell that forex to their customers. According to the MPC, this move will help support and strengthen the interbank market to ensure that it is the primary source for forex needs in the economy. The policy shift comes after the May 29th announcement from the Treasury limiting forex auction envelope to a maximum of US$5 million per week.
The inaugural wholesale forex auction for banks was conducted on the 7th of June 2023. About US$11.2 million was allotted as the ZWL plummeted by 24.5% to ZWL/USD 4868.52 from ZWL3673.77 a daily earlier (June 6th) when US$4.99 million was traded at the retail forex auction for importers. In the previous week, the ZWL plummeted significantly against the USD at the Dutch forex auction of 30 May 2023 as it erased about 26.7% of its value to settle at ZWL/USD 2577.06 from ZWL/USD 1888.01 realized on the 23rd of May 2023. All this shows that in only 6 days (30 May-7 June) the ZWL has lost about 47.1% of its value in the Dutch auction market. In year-to-date (YTD) terms, the local unit is down 85.5% at the auction market.
The foregoing massive decline of the ZWL in the official markets can be viewed as an exchange rate adjustment to recent Treasury policy shifts. When the forex auction was introduced on 23 June 2020, the ZWL lost 56.4% in the first trade. However, as authorities buttressed the new auction system with fiscal discipline and tight monetary targeting, the ZWL gained 20% in the alternative markets between July and September 2020. The average parallel rate sailed stable through November 2020 before it started to burgeon again in response to rising liquidity growth associated with spiking fiscal spending in the fourth quarter.
So, I highly commend the MPC for the bold action it took toward increased liberalization of the exchange rate which if aided by other prudent policy actions like discontinuation of quasi-fiscal activities by RBZ, sustainable Treasury spending, and increased fiscal transparency will help arrest the ongoing ZWL instability. To allow the market to freely determine the true ZWL price, the MPC has also removed the 10% interbank trading margin to the auction and increased interbank maximum bids from US$100 000 to US$500 000. The 90-day forex liquidation requirement which was instituted earlier by Treasury was scrapped by the MPC. To me, this move will help reduce forex demand on the interbank market as many businesses will utilize their FCA balances to meet forex needs.
More so, the MPC had resolved to increase the RBZ benchmark policy rate from 140% to 150%. This is meant to discourage speculative borrowing in the economy which fuels consumer and business spending, especially on big-ticket items. Rising interest rates tend to weigh on asset prices, reversing the wealth effect for individuals and making banks more cautious in lending decisions. Also, when the RBZ responds to elevated inflation risks by raising its benchmark policy rate, it effectively increases the level of risk-free reserves in the financial system, limiting the money supply available for purchases of riskier assets.
Although the policy rate recently set by MPC is way below the prevailing ZWL inflation independently estimated at above 700% (inadequate to discourage speculation), rising interest rates signal the likelihood that RBZ will continue to tighten monetary policy, further tamping down inflation expectations. In addition, the MPC decided to increase the statutory reserve requirement (SRR) ratio on ZWL call and demand deposits to 15% from 10%. The SRR is an instrument used by central banks to manage the significant build-up of liquidity which may result in financial imbalances and create risks to financial stability. As such, increasing the SRR ratio has the effect of reducing the money available for lending by banks.
The foregoing actions taken by the MPC this week complements stabilization measures previously announced by the Treasury such as promotion of ZWL use and sterilization of excess liquidity. If prudently implemented in full, these actions will go a long way in suppressing ZWL decline, ceteris paribus.
Nevertheless, it remains to be seen if there is adequate political will to allow the Treasury to thwart mounting spending pressure emanating from the upcoming harmonized elections. Generally, elections in developing nations like Zimbabwe fuel opportunistic political business cycles – volatile changes in fiscal spending and taxation – which worsen the already fragile macroeconomic environment. In other words, without political will to swiftly reform the economy and public institutions, the status quo (massive ZWL decline, rampant price growth, rising abject poverty, etc) will remain thus risking full market dollarization.
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
