THE Zimbabwe Independent today hosts a webinar on the Mid-term Monetary Policy presented a fortnight ago by the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya, who is the keynote speaker.
The other panellists are Confederation of Zimbabwe Industries CE Sekai Kuvarika, Zimbabwe National Chamber of Commerce CE Christopher Mugaga, Institute of Chartered Accountants of Zimbabwe technical manager Owen Mavengere and development economist Chenayimoyo Mutambasere.
Watch this exciting conversation, whose theme is ‘Monetary Policy — A tool to solve economic problems’ on Heart and Soul Zim, Newsday and Zimbabwe Independent and Standard Facebook pages starting at 8am.
Below are excerpts from Mangudya’s policy statement:
Introduction and background
This Monetary Policy Statement (the Statement) comes at a time when the Government has ably shown steadfast commitment to sustaining the economic reform momentum. Despite the difficulties caused by the Covid-19 pandemic, the economy is on the rebound.
The close co-ordination between fiscal and monetary authorities, as shown by the sustained fiscal discipline and tight monetary conditions, coupled with the smooth operation of the Foreign Exchange Auction System, have fostered macroeconomic stability.
Accordingly, inflationary pressures in the economy have dissipated, thus creating a conducive monetary and financial environment essential to supporting the envisaged growth of 7,8% in 2021 and a robust economic growth in the medium term. The anticipated recovery of the global economy in 2021 and the spill-over effects of the stimulus packages in the developed countries and Asia, together with the soon to be availed SDR allocations of US$650 billion into the world economy by the International Monetary Fund (IMF), are expected to have a positive trickle-down effect on the country’s growth trajectory. The Bank is confident that the current stability of inflation and exchange rates, supported by a buoyant external sector performance, will continue in the outlook period.
The external sector performance has also been driven by strong recovery of the global economy, projected at 6% this year. The strong global economic recovery has resulted in a rally in international commodity prices, particularly of platinum, nickel and copper. Moreover, tobacco prices have been firmer at an average price of US$2,92/kg during the just-ended marketing season compared to the previous season where the average price was US$2,55/kg.
On account of the strong external sector performance, foreign currency receipts have remained buoyant, with US$4,02 billion having been received in the first half of the year, compared to US$3,12 billion received over the same period in 2020, representing a 29,1% increase in foreign currency supply into the economy. Of this amount, diaspora remittances received through the formal system amounted to US$649 million, an impressive 73% increase from US$374,6 million received during the same period in 2020.
These positive economic developments are key in sustaining the Foreign Exchange Auction System which has had a significant impact on the national economy since its inception on the 23rd of June 2020. Commendably, the Foreign Exchange Auction System which has to date disbursed US$1,72 billion has ensured uninterrupted financing of importation of key raw materials and equipment for the productive sectors of the economy.
Capacity utilisation in the manufacturing sector has, as a result, increased from 36% in 2019 to 47% in 2020 and is expected to further increase to above 61% in 2021. Against this background, this Statement which is issued in terms of Section 46 of the Reserve Bank of Zimbabwe Act [Chapter 22:15] reviews the monetary policy measures pursued by the Bank since the last Statement and outlines the new monetary policy measures to be followed by the Bank in the second half of the year.
Monetary policy measures
The obtaining macro-economic stability, which is expected to continue to be reinforced by the positive outlook on inflation and the balance of payments position, requires the Bank to stay the course and maintain its current monetary policy position which has had positive impact on the economy.
Accordingly, the following measures will anchor the Bank’s monetary policy stance for the rest of this year:
- The Bank’s overnight accommodation of 40% and the medium-term lending rate for productive sector of 30% will be maintained in the short term, in order to control money supply and curb speculative activities. The Bank shall continue to review the policy rates in response to the downward inflation trajectory.
- The 5% statutory reserve requirement for demand and call deposits and the 2,5% reserve requirement for time deposits will be maintained in the second half of the year. This differential reserve requirement system remains necessary as an incentive structure for banks to promote savings in the economy.
- Quarterly target for the growth of reserve money for the remaining six months of 2021 remains at 20%. This is necessary to anchor inflation expectations at sustainable levels through controlling money supply and to allow for the necessary accommodation for the growth of the economy.
- A cap on the interest rate at which banks can on-lend the proceeds from the Medium-term Lending Facility is also maintained at 10% above the borrowing rate to ensure recovery of the productive sectors of the economy.
- The Bank will start to set aside foreign exchange resources to build the country’s foreign exchange reserves to anchor exchange rate stability and to cope with transitory exchange rate shocks in the national economy.
- The Bank has put in place the following measures to deal with the residual foreign exchange auction allotment backlog:
- Utilisation of the existing letters of credit facilities for the importation of strategic commodities and capital goods in order to lessen the demand on the Foreign Exchange Auction System;
- Supporting banks to promote financial intermediation to leverage on the current long foreign exchange position of around US$1.7 billion in the banking system; and
- Working closely with Government to ensure that some of the foreign exchange balances in the Exchequer Account are utilised to expunge the backlog.
- The Bank is addressing the gap between the official and parallel exchange rates through tightening money supply, expunging the foreign exchange allotment backlog, increasing the attractiveness of the local currency so that the local currency complements rather than competes with the USD, discouraging rent-seeking behaviour and promote.
- The Bank is satisfied with the achievements of the Foreign Exchange Auction System which have had a significant impact on the economy over the year it has been in operation. The Bank is thus continuing with the Foreign Exchange Auction System and is determined to strengthen the system to ensure that it reflects economic and market fundamentals of supply and demand.
The auction system is open to everyone for legitimate foreign exchange transactions through the bidding process. Bids are submitted through banks by individuals and entities that require foreign currency. It is a transparent system and the Bank is only administrator of the system and does not manipulate the auction system, neither does it participate on the foreign exchange parallel market.
The Bank shall therefore continue to foster compliance and enhance monitoring of the Foreign Exchange Auction System. As a public institution, the Bank shall also maintain its stance to enhance transparency and accountability in the operation of the Foreign Exchange Auction System.
- The Bank is enhancing financial inclusion which is critical for inclusive growth through the development of the National Financial Inclusion Strategy Phase 2 (NFIS 2) for 20212025. The NFIS 2 will seek to address the challenges and gaps noted in the NFIS 1, with more focus on usage, digital financial services, quality of financial services, fintech and product innovation, financial inclusion data disaggregation and sustainability.
The economy is rebounding on account of the stable macro-economic conditions. Both the external and real sectors of the economy are expected to remain strong in the outlook period. We, therefore, need to stay the course and consolidate the current economic policy measures for stability and sustainable growth of the economy.
The expected positive growth of the world economy, supported by stimulus packages in the developed countries and Asia and from the IMF will buttress Zimbabwe’s economic growth trajectory. In addition, the expected increase in commodity prices on account of increased global demand will enhance the country’s export performance, notwithstanding the expected rise in global inflation which will have moderate pass-through effects to domestic inflation.
The Government has put in place elaborate measures to deal with the Covid-19 pandemic including the vaccination programme, which is one of the best in Africa. Thus whilst the economic outlook is positive, concerted efforts to continue mitigating the negative effects of the Covid-19 pandemic on the economy remain paramount to maintain the current positive economic trajectory.
Overall, the economy is on the right track. It is rebounding. The outlook is positive on account of the remarkable hawkish monetary policy stance being pursued by the Bank, Government’s strong fiscal sustainability and the positive global financial developments.
This stable and positive macroeconomic environment points to the need for the Bank to continue with its current monetary policy stance to support the robust economic growth of at least 7,8% in 2021, while continuing to reduce annual inflation to the desired level of around 30% by the end of December 2021. -JOHN PANONETSA MANGUDYA, RBZ GOVERNOR.