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Monetary policy 2022 analysis

By Victor Bhoroma

The Reserve Bank of Zimbabwe (RBZ) presented its first monetary policy statement for this year on  February 7. The monetary policy comes after a 53,5% surge in foreign currency receipts from US$6,31 billion to US$9,69 billion. The major contributors to the surge being the increase in the value of commodity exports from US$3,72 billion to US$6,19 billion and increase in diaspora remittances from US$1 billion to US$1,43 billion.

The increase in minerals export growth was anchored on the surge in gold production from 19 tonnes in 2020 to 29,6 tonnes in 2021, the rally in mining commodity prices on the world market and the added value of exporting beneficiated PGM metals. Despite the year-on-year growth in foreign currency earnings starting as far back as 2009, the country is stuck in unrelenting foreign currency shortages on the formal market. The country’s merchandise imports grew by 45,2% to US$6,99 billion, resulting in a negative balance of trade (BOT) of US$795 million. The imports figure does not factor in the millions of smuggled and under-declared merchandise that pass through Zimbabwe’s ports of entry.

The central bank adopted a highly optimistic line through maintaining the current auction system (avoiding the necessary open market reforms) and promoting the usage of the Zimbabwean dollar in the face of popular calls to formally dollarise the economy. Some of the key highlights from the monetary policy statement include:

Inflation management

The central bank must be commended for exercising some level of discipline on money supply and ending some quasi-fiscal operations in 2021. As a result, annual inflation decelerated from 348% in December 2020 to 60,7% by January 2022.

Going forward, the central bank is targeting an end of year inflation figure between 25-35%. The target is very much unrealistic considering the fact that the parallel market rate has maintained its upward trajectory and there is absolutely zero confidence in the local currency. The local currency is merely a transitory unit of transaction. It is not a store of value, neither is it a standard for deferred nor future payments. Every economic agent has to quickly get rid of their Zimbabwean dollar as soon as possible and buy foreign currency with the excess which explains the abnormal velocity. This also explains why 56% of local transactions are in local currency as opposed to the US dollar on the formal market. The Zimbabwean economy is predominantly dollarised as most transactions are done either in US dollar or Zim dollar prices indexed on the parallel market rates. The few businesses that use a blended approach are recipients of foreign currency from the auction allocation system (indirect import subsidy). Lastly, the country has now gone into 2023 election mode where there is a high propensity to appease the electorate with increments to civil service salaries, agriculture inputs, infrastructure projects and other populist policies which have an effect of increasing money supply in the economy. All the above create an unsustainable demand for foreign currency, and it shall continue beyond 2023. Inflation will likely end 2022 in the 60%-90% range.

Transaction limits

High levels of inflation have necessitated consistent review to transaction limits. The central bank reviewed person-to-business (P2B) transaction limits from ZW$20 000 to ZW$25 000 per transaction, with a weekly cap of ZW$100 000.  Person-to-person (P2P) limits have been doubled from ZW$5 000 to Z$10 000, with a weekly cap of ZW$70 000. Cash withdrawal limits have been adjusted from ZW$5 000 to a maximum of ZW$5 000 per week. The central bank is worried about parallel market activities and illicit transactions. However, further adjustments on transaction limits will be needed in the next six months.

Foreign currency retention

The central bank reviewed export retention levels in line with demands from various sectors of the economy. The tourism and hospitality players which are facing viability challenges due to Covid-19 travel restrictions shall retain 100% of their foreign currency earnings. The retention will largely apply on payments made offshore or via VISA/Mastercard locally. The central bank made the welcome call on this end as this will allow the players to quickly recapitalise and improve viability.

There has been a notable slump in business and loss of livelihoods in tourism hotspots which are dependent on tourist arrivals such as Victoria Falls, Kariba, Vumba and others.  The manufacturing, horticulture and cross-border transport operators shall retain 100% of their incremental portion of export receipts. This means that the affected businesses will not see any benefit from the policy unless they increase their exports.

The central bank is ignoring the impact of its exchange rate policies on manufacturing sector export competitiveness. Most of the local manufacturers are now cutting on exports at a time the country should boost its share of manufactured exports in line with AfCFTA. Therefore, industrialisation remains a mere blueprint with no policy back up or alignment with other government initiatives.

Tobacco farmers will retain 75% of their foreign currency receipts, which are treated as free funds. Additionally, the politically powerful tobacco merchants will retain 80% of the portion of the incremental value addition repatriated into the country and 100% of proceeds from local sales of tobacco through inter-merchant sales. Farmers will be happy with the policy as most still wallow in poverty, despite record production of the golden leaf in the past five years.

Auction allocation system

From June 2020 to date, the central bank allocation platform has allotted US$2,740 billion to approximately 7 500 beneficiaries in the country. Large businesses on the main auction make up 28% of the total recipients, while small-to-medium enterprises (SMEs) and Individuals constitute the remainder. In 2021, the auction platform allocated US$1,971 billion to selected bidders with over US$1,645 billion allocated to large businesses that make up 28% of the total bidders’ count.  However, it is worth noting that central bank reports show that Zimbabwe imported machinery and equipment worth over US$650 million in a space of 18 months from July to December 2021. It remains to be seen which economic sector received the bulk of the machinery or equipment.

Bureau-de-change facility

The central bank has re-modelled the US$50 per week facility disbursed via bureaux-de-change houses. As with most government projects, the facility had been hijacked and abused by a few connected people. The bank did not announce any investigation or efforts to pursue the so-called abusers where approximately US$23,1 million was disbursed to 461 908 people in a short space of five months. The apex bank pointed out that the facility will only be given to pensioners, people living with disabilities and those that need forex for medical purposes. It is widely expected that most senior citizens and the disabled will now have solid bank accounts, while doctors’ reports will become a hot commodity.

Re-dollarisation

In line with its mandate, the central bank made the right call on measures to promote the use of the local currency. The bank will set aside 5% of the foreign exchange available at the auction system to provide the necessary back-up and enhance the attractiveness of the local currency. This is in sync with the treasury announced policy where miners will now pay taxes and royalties in local currency up to a maximum of 50%, import duty on designated motor vehicles will be paid in local currency up to a limit of 50% and domestic taxes payable by exporters will be payable in local currency up to the limit of surrendered export earnings.

The bank also maintained the bank policy rate and the Medium-Term Accommodation (MTA) facility interest rate 60% and 40% respectively to minimise speculative borrowing or lending to unproductive sectors of the economy. The central bank ruled out re-dollarisation even though it should be noted that the local market was never dollarised by the apex bank or the government. The market self-dollarised after the Zimbabwean dollar lost all its value due to hyperinflation. Therefore, dollarisation is beyond the control of the central bank or statutory instruments.

The local currency can only maintain its value over time if the central bank reins in money supply growth and completely stops quasi-fiscal operations. Inflation in Zimbabwe is largely a money supply phenomenon.

Overall, the central bank did not make any material changes on key issues such as interest rates and export retention levels. Regrettably, it did not address the foreign exchange market inefficiencies bedevilling the market where it is the main culprit through manipulating the auction system exchange rate. The pegging of foreign exchange rate is one of the biggest constraints to economic stability locally and the central bank has shown no willingness to reform the auction system through following known Dutch Auction principles.

  • Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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