Is base money responsible for Zimdollar crash?

ACCORDING to the Reserve Bank of Zimbabwe’s latest bi-monthly report, base money as at June 19 stood at ZW$13,9 billion up from ZW$13,3 billion at the close of the prior week.

Respect Gwenzi

The movement represents a ZW$0,6 billion weekly growth or 4,3% growth. The aggregate had however been on a downward trend for two straight weeks before spiking to ZW$13,9 billion, as shown.

The base money element of broad money supply includes issued currency (notes and coins), statutory reserves, Real-Time Gross Settlement (RTGS) balances and other deposits.

The major element of base money is issued currency and balances of RTGS. These are exclusively injected at the liberty of the central bank. This element of money supply is also referred to as high-powered money due to its potential impact on price levels and currency stability.

It is therefore the most important element of money supply. Broad money supply would include nostro balances converted at respective closing exchange rates and thus distort actual growth of money supply. Further to the above background, the RBZ, prior to publishing bi-monthly reserve money updates, published monthly and quarterly economic bulletins whose main data focussed on money supply. The reports were however three to five months delayed which would make the data less useful in analysis. This naturally led to speculation, contributing to the plunge in the Zimbabwean dollar.

The central bank thus hopes that by publishing reserve money data every fortnight, which is a form of improved transparency, perception over currency would improve, assuming the money supply levels are stable. The bank also believes the currency is grossly undervalued and that it should trade at more favourable rates to the US dollar.

Given this view, the bank has aimed at publishing frequent data not only on money supply but also on trading activity, to improve market confidence. We generally commend these efforts. All else being equal, it helps close the speculation and information asymmetry gap, which collectively contributes to market forces-driven price discovery.

Getting back to the data, the reserve money growth factor is very worrying, both on a week-on-week and a year-to-date basis at 4,3% and 34% respectively. Much of this ZW$3,5 billion in reserve money growth is emanating from growth in excess reserves, which are reserves kept by banks at the RBZ.

Looking at the latest data, ZW$1,04 billion in excess reserves was created during the week under review. There are two aspects to this growth, the first being the impact of reduced required reserves ratio which culminated in a ZW$0,6 billion decline in required reserve balances.

These balances would automatically shift to excess reserves if banks do not utilise same. On the other hand, part of the ZW$1,04 billion growth in excess reserves reflects the RBZ’s creation of new money through the RTGS system.

Collectively, the growth in excess reserves has an inflationary effect on the economy. The RBZ needs to slow down on money creation to tame exchange rate volatility.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. —