Unrestrained money supply growth sinking Zimdollar

Victor Bhoroma

THE Reserve Bank of Zimbabwe (RBZ) is expected to present the first Monitory Policy Statement of 2020 in the next 30 days.The statement comes after Treasury highlighted that the country will have an expansionary fiscal policy in 2020, indicating that government expenditure will be significantly increased to boost economic growth.

In 2019, the economy declined for the first time in a decade by more than 6,5%. The United Nations (UN) has added its voice to the Zimbabwean economic crisis by pointing that the economy is in severe distress, and will shrink by 2,5% in 2020.

Unresolved economic challenges include low levels of confidence, weak investment, high public debt, power supply gaps, uncontrolled inflation, and decline in aggregate demand, fuel and foreign currency shortages.

In the past six months, unrestrained money supply growth has led to the freefall of the re-introduced Zimbabwean dollar and an upsurge in inflation rate to over 521% as of December 2019.

In October 2019, broad money supply had advanced to ZW$28,93 billion and estimates point to a December figure of more than ZW$36 billion. Narrow money refers to all the notes and coins in circulation plus transferable deposits (including foreign currency account (FCA) balances) held by various banks, while broad money supply includes all forms of money from notes and coins, transferable deposits, savings, treasury bills and other marketable securities that can be easily converted to cash. As of October, FCA balances were Z$11,2 billion (US$692 million) and Reserve money was Z$6.8 billion.

This means despite the widely evident economic collapse, the publicised expenditure cuts in government and fiscal surpluses, money supply continued to grow especially after the banning of the multi-currency regime in June 2019.

The growth in narrow money (excluding FCA converted balances) to Z$15,8 billion by October shows that money supply growth heightened towards year-end and is likely to continue at higher levels due to elevated inflation.

Treasury will most likely announce a supplementary budget before August 2020 to enhance the ZW$63,6 billion budget set in November 2019. In August 2019, a supplementary budget of ZW$10,85 billion was announced by Treasury. The supplementary budget had a figure higher than the original ZW$8,2 billion set in November 2018 thus highlighting the negative impact of inflation on government expenditure.

Money supply growth in Zimbabwe is mainly caused by issuance and repayments of short-term debt instruments (Treasury Bills), government borrowings from the RBZ through the overdraft facility, foreign currency retention deposits for local exporters, and Real-Time Gross Settlement credits by the central bank which are not backed by any foreign currency reserves. These facilities are largely motivated by the need to cover recurring budget deficits and fund various government programmes such as command agriculture, presidential inputs scheme and targeted subsidies to various economic players.

Between 2015 and 2018, government unauthorised expenditure amounted to US$9,68 billion with command agriculture alone accounting for 55% of that expenditure. The government announced that it was remodelling the agricultural scheme through restricting itself to providing guarantees to banks and the private sector as a way of unlocking the required funding of ZW$2,8 billion.

It remains to be seen whether this will materialise, considering private sector concerns on the viability and bankability of 99-year leases and land tenure concerns in Zimbabwe.

The Zimbabwean dollar started trading on the interbank on February 20, 2019. On that date, the US dollar-toZimdollar rate was 1:2,5. The rate has tumbled to more than 1:17,15 on the Interbank and 1:25 on the black market with the volatility of the unit directly connected to money supply spikes, especially from July to October 2019 when annual money supply grew from 82% to 192%. Zimbabwe’s money supply growth tops in the world alongside Venezuela, Sudan and South Sudan. The four countries also top the charts in terms of the highest levels of inflation rate in the world in 2019.

Venezuela suspended releasing inflation figures in early 2018, however their inflation rate is estimated to be 38 000% as of September 2019 with Zimbabwe slipping in second position at 521%, while South Sudan and Sudan recorded 171% and 58% respectively.

Money supply growth causes catastrophic damage to the economy through increase in inflation as local prices are directly indexed to the US dollar via the black market rate.

Any increase in money supply results in higher demand for foreign currency as various producers and other economic agents hedge against future losses in the local currency by buying foreign currency.

On September 20 2019, black market rates tumbled from US$1: ZW$23 to US$1:ZW$16 after the central bank suspended four corporate accounts that were suspected of buying foreign currency on the black market, thereby inflating exchange rates and stoking local prices. The rate however gradually stabilised at 23 for close to three months running into January 2020.

However, there has been slight movement in the past week, signaling large sums of payments from Treasury or growth in electronic balances. The change in black market exchange rate will likely trigger price increases at a time the market is gradually resetting to the US dollar.

Some local towns such as Bulawayo, Victoria Falls and Beitbridge reverted back to multi-currencies in mid-2019, while trade in the small to medium enterprises (SMEs) or informal markets is openly done in the US dollar.

It can be observed that multi-currencies are easily accepted almost anywhere in the market save for the largest retail outlets in the country.

The central bank has pointed out that it will introduce close to ZW$1 billion into the market to meet legitimate demands for notes and coins by the transacting public. The injection is being done gradually via new ZW$2 notes and coins, and ZW$5 notes to bring the total value of notes and coins to ZW$2 billion.

The figure is in line with global standards of 10-15% cash as a percentage to total transferable deposits in the economy. The introduction of new notes and coins will help to ease cash shortages in the market. However, it is apparent that further growth in money supply to support government consumption will be catastrophic for the Zimbabwean dollar.

Recommendations to the government to limit annual money supply growth to less than 30% have fallen on deaf ears in the past two years.With all foreign financiers and bilateral institutions closing taps for foreign debt due to non-payment of sovereign debts, the cash-strapped government cannot possibly cut taxes to boost consumer spending. The easiest way out will be to revert back to unrestrained money printing, in the hope that the local currency will stay in the ring for as long as it can hold.

Bhoroma is a freelance economic analyst. He holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or follow him on Twitter @VictorBhoroma1.Bhoroma is an economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or follow him on Twitter: @VictorBhoroma1.

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