RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya will soon present the Mid-Term Monetary Policy, where the market expects him to announce measures that will help rein in galloping inflation and manage currency volatility on the market.
Since the introduction of the local currency in June 2019 through Statutory Instrument 142, it has plunged 1 212% against the United States dollar, with the official foreign currency rate standing at US$1:ZW$82,91.
The freefall of the local unit has resulted in the return of hyperinflation that has led to companies losing millions of dollars, and in some cases billions.
It has also devalued wages to such an extent that minimum monthly wages of ZW$2 500 are now pegged at US$30 at the official rate and US$20 on the parallel market.
For this reason, there is mounting pressure for the authorities to address the fall of the Zimbabwean dollar and curb inflation.
Financial expert Persistence Gwanyanya said: “The most important thing at the moment is what we call monetary targeting. The Reserve Bank of Zimbabwe is targeting a certain level of money supply growth, which is expected to result in a second level of inflation growth, so we want to understand how we are progressing well towards the achievement of monetary policy target.”
“If you look at the money supply growth, I am more likely inclined to look at the reserve money because it is the usable balance. If you look at reports that were coming out from the reserve bank, you will find that the reserve money has been declining from a peak of around ZW$24 billion (US$289,4 million) to about — immediately before the establishment of the auction system- ZW$15,77 billion (US$190,2 million).”
He added: “So, we want to be assured by the monetary policy that the contraction that has been observed so far on the containment of reserve money growth is going to be sustained, especially now that we are going into the farming season.”
Gwanyanya said around the farming season, government has had a habit of increasing the money supply in order to fund farming activities, which if repeated this year would significantly increase inflation.
Increasing the reserve money would in essence increase the money supply.
And due to not having the corresponding economic growth at the same pace with the increase in the money supply this will be inflationary.
“We want to also be convinced how the Reserve Bank is going to sustain the auction system which in my view has been a success so far in the quest to achieve rate convergence. But, if you look at how the auction has been sustained on the supply side, it’s mainly the liquidation of the surrender portion of foreign currency from exporters,” Gwanyanya said.
“So, the government has been the major supplier of foreign currency in the auction system so one wonders whether this is going to be sustainable going forward.”
Since the introduction of the foreign currency auction system on June 23, the local unit has slowly stabilised, which has also slowed its depreciation on the parallel market.
However, looking at how the amount of money allotted to the auction weekly either depreciates or remains the same it seems that the supply of US dollars is mainly coming from the central bank.
This is because every month the Reserve Bank of Zimbabwe retains an average of between 30% and 35% of foreign currency earned by exporters to use for the importation of critical raw materials, fuel and basic food commodities.
As such, while the local unit has seemingly stabilised, the prices of goods and services still remain high as there is still not enough foreign currency to back the Zimbabwean dollar.
The depreciation of the local unit has been inflationary, as businesses are increasing their prices daily to maintain the values of goods and services. It has also resulted in the erosion of monthly wages, leading to workers demanding salaries in foreign currency.
Zimbabwe Congress of Trade Union secretary General Japhet Moyo said: “Our local currency has not been stable so we had suggestions that we had put to the government to consider. We don’t believe that current interventions like the auction are going to deal with the stabilisation of the currency.”
“We had given options that the government needs to consider like probably ditching the local currency in favour of other currencies. This is something that we still put on the table that the government needs to consider because workers are failing to cope with inflation and the local currency is losing value against other currencies.”
Why the government has refused to abandon the local currency in favour of foreign currencies is due to the fact that the country does not earn foreign currency.
However, Moyo said there was enough foreign currency in the economy adding that all that was needed was market confidence to make people use it formally.
“If you look at Mbare at the moment and look at the transactions people are transacting in US dollars,” he said.