Analysis of RBZ’s Mid-term Monetary Policy Statement

Accordingly, the Mid-Term Monetary Policy Statement highlights the recent developments in monetary, external and banking sectors as well as policy measures the bank is implementing in pursuit of price, exchange rate and financial system stability, which are the key mandates of the RBZ.

Ronald Zvendiya THE Reserve Bank of Zimbabwe (RBZ) issued the Mid-Term Monetary Policy Statement on August 11 2022. The theme is “Restoring Price and Exchange Rate Stability,” which means that the RBZ’s major concern is significantly reducing inflation and curbing persistent exchange rate depreciation.

Accordingly, the Mid-Term Monetary Policy Statement highlights the recent developments in monetary, external and banking sectors as well as policy measures the bank is implementing in pursuit of price, exchange rate and financial system stability, which are the key mandates of the RBZ.

More importantly, the Mid-Term Monetary Policy  Statement also outlines the monetary policy stance to be followed by the RBZ in the second half of 2022.

The current analysis focuses on the monetary policy stance for the next six months, which is anchored on interest rates, statutory reserves, Mosi-oa-Tunya gold coins and the foreign exchange auction.

Interest rates The policy rate is at 200% effective June 24 2022 while deposit interest rates on savings remain at 40% per annum. In nominal terms, this translates to an interest rate spread of 160%.

Considering an inflation rate of 256,9% recorded at the end of July 2022, it means both banks and depositors continue to get negative returns.

Furthermore, economic agents lost confidence in the banking system since deposit interest rates on savings are around six-fold lower than the level of inflation.

Thus, instead of the deposited funds gaining value they are instead losing it. The value loss is widened by high bank charges as well as transaction costs.

Therefore, given the inflation rate trajectory, commercial banks will be reluctant to lend while economic agents will be reluctant to deposit their money at current interest rates.

Therefore, an increase in policy rates reduces speculative borrowing and stabilises the exchange rate only when there is price stability.

The downside is that the cost of finance is expected to increase thus discouraging borrowing from financial institutions. With companies already recovering from the impact of the Covid-19, this could have a negative effect on economic growth projections.

Facilities should be put in place to assist businesses to access cheaper financing, but with restrictive measures to ensure these facilities are not abused for speculative purposes.

Foreign exchange auction

It is commendable to notice that efforts have been made by the RBZ to clear the backlog of all allotted amounts in respect of Auctions FX94 to FX102, and is in the process of settling the ring-fenced backlog from main auctions 83 to 93, amounting to US$169 million, to clear it within a short space of time.

Furthermore, the priority being given to the productive sector is a welcome development. The productive sectors of the economy continue to receive most of the funds allotted at foreign currency auctions, with more than 65% of the allotments going towards supporting those sectors.

As at July 26 2022, 41% of the total allotments financed raw materials, whilst 22% funded capital goods such as plant, machinery and equipment with 3% being allocated to fuel, electricity and gas.

The foreign exchange auction remains a critical platform on which industry and commerce access foreign exchange. However, the foreign exchange auction system is no longer a price discovery mechanism but instead the most ideal allocative platform of foreign currency in the domestic economy.

Given the critical importance of the auction system, the following proposals, not explicitly mentioned in the Mid-Term Monetary Policy Statement, should be considered:

Speed up payments after auction results. That is 14 days is a bit on the high side and the RBZ may consider cutting it back to seven days;

Paying the full bid awarded;

Pay the right people – the narrative with some of the economic agents is that some people getting the money are not the ones needing it and there are a lot of briefcase companies.

Those abusing the auction system driving the black market exchange rate up should be brought to book and the RBZ is expected to disseminate the information to the public on action taken.

The Mid-Term Monetary Policy Statement alludes that auction bids will continue to be guided by the exchange rates obtained on the willing-buyer-willing-seller foreign exchange trading platform and by the available foreign currency.

However, the popular belief is that the auction system is planned and manipulated by those benefiting from it as well as companies with connections.

Therefore, the interbank rate is overvaluing the local currency, thus creating arbitrage opportunities. Hence, at some point, the auction system needs to be abandoned.

Mosi-oa-Tunya gold coins

Higher levels of inflation resulted in the local currency partially fulfilling the functions of money, such as medium of exchange, a unit of account and store of value.

The gold coin can be used as an avenue for value preservation, mopping up excess liquidity from the economy in order to preserve the value of the local currency, reducing liquidity in the market, and reducing foreign currency demand on the parallel market and thus stabilising the exchange rate and prices.

However, for low-income earners, the current price of US$1 872,36 is on the higher end. Hence, the central bank’s announcement in the Mid-Term Monetary Policy Statement that it shall introduce and release into the market gold coins in smaller units of a tenth ounce, quarter ounce and a half ounce for sale with effect from mid-November 2022 is a welcome development.

This will ensure that gold coins will be affordable to civil servants and other low-income earners with the desire to preserve the value of their savings.

Given that the interbank rate overvalues the local currency, allowing gold coins to be purchased in Zimbabwean dollars creates arbitrage opportunities.

For instance, one can sell the US dollar on the black market at a high rate and buy the gold coin using ZWD at the interbank rate. Therefore, the RBZ may consider selling the gold coins in forex only in the interim.

The Mid-Term Monetary Policy Statement should also have addressed the following grey areas concerning gold coins. First, what are the modalities when one wants to only liquidate a fraction of the gold coin?

Second, what are the control measures for ensuring that criminals do not launder money through gold coins?

For instance, the requirements for identifying and verifying the source of funds.

Money supply growth

This is the main driver of inflation and exchange rate movements in the country. Therefore, there is a need for the government to interrogate sources of money supply growth, its procurement pricing models fuelling inflation and put in place corrective measures.

However, it is imperative to acknowledge that on its part, the government is taking steps to review its procurement approach to minimise the practice of forwarding exchange rate pricing that was being pursued by its suppliers of goods and services.

In conclusion, the RBZ should continuously review its monetary policy toolkit in line with inflation developments and policy measures being put in place by the government.

The targets set in the Mid-Term Monetary Policy Statement are achievable but require diligence and the cooperation of all stakeholders in the economy as well as fine-tuning of the auction system.

  • Zvendiya is a research and innovation analyst at Insurance and Pensions Commissions (Ipec) who writes in his individual  capacity. —  [email protected]. These weekly New Perspectives articles published in the Zimbabwe Independent and co-ordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society (ZES) and past president of the Institute of Chartered Secretaries & Administrators in Zimbabwe (ICSAZ). [email protected] and mobile No. +263 772 382 852.