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Golden Sibanda Business News Editor

RESERVE Bank of Zimbabwe (RBZ) Governor Dr John Mushayavanhu has projected inflation to fall below 5 percent by year end, as inflationary pressures that have characterised Zimbabwe’s economy in the recent past due to exchange rate volatility, dissipate following the introduction of the new currency.

Zimbabwe’s annual inflation rose to a seven-month high of 55,3 percent in March from 47,6 percent in the previous month, the National Statistics Agency (ZimStat) reported last month.

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The RBZ Governor noted that the exchange rate and inflation volatilities experienced in the economy continued to threaten the prospects of the local currency under the multi-currency system, hence the coterie of proposed policy interventions he announced in the 2024 MPS, including the new structured, Zimbabwe Gold (ZiG).

Dr Mushayavanhu defined the “structured currency” as a currency “pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets potentially including gold”.

It means that, he added, the central bank can only issue domestic coins and notes when fully backed by a foreign currency or foreign assets and the assets and that currency should be fully convertible in the bank’s reserve currency on demand.

He gave the inflation projections when he presented his inaugural Monetary Policy Statement on Friday, which he said was a product of wide consultations, including business community, civil society, economists and international financial institutions like the World Bank and IMF.

One of the key policy pronouncements, the structured currency, is a medium of exchange backed by a composite basket of precious minerals, mainly gold, and foreign exchange.

The new central bank chief said the apex bank was recalibrating its monetary policy framework to address the current state of price and exchange rate instability in the economy.

He said the policy stance was informed by two strategic policy pillars restoring price and exchange rate stability and remonetising the local currency to serve its role as a medium of exchange and a store of value.

The latest policy framework sought to rebuild market confidence and trust, as well as bank policy credibility. The policy measures Dr Mushayavanhu announced in the 2024 MPS are expected to anchor the exchange rate and thus restore inflation and macroeconomic stability.

In Zimbabwe, prices of goods and services in the local currency track the US dollar exchange rate movements.

But he said the several policy interventions, which included the commodity and foreign exchange-backed currency, tight monetary policy framework and zero tolerance for quasifiscal activities would guarantee exchange rate stability and low inflation.

He said inflation would continue to climb higher in the immediate future, but slow down rapidly over short to medium term.

“The introduction of a structured currency should result in the dissipation of inflationary pressures in the short to medium term. As such, monthly inflation rates are expected to be well below 1 percent as the currency will be anchored on stable foreign currency and commodities,” Dr Mushayavanhu said. 

Importantly, he said, the inflation profile was expected to mirror the current trend of the domestic US dollar inflation which averaged 5,03 percent in 2023.

“In the near term, reflecting the current inflationary pressures, inflation is expected to be elevated in the first quarter and dissipate in the medium term in line with stability in ZiG.

“As such, despite an expected bump in inflation in the near term, annual inflation is expected to close the year below 5 percent,” Dr Mushayavanhu said.

The central bank Governor noted that exchange rate volatility, which has driven rapid inflation increases in the country, was caused by high demand for foreign currency as a store of value, reduced confidence due to continued currency volatility, the widening margin between the interbank and parallel market exchange rates, reduced use of the local currency for domestic transactions and lack of certainty and predictability on the exchange rate front.

Dr Mushayavanhu said as a result of the volatility in the local currency the domestic economy had lately been moving towards full dollarisation,  with over 80 percent of market transactions now conducted in US dollars.

The central bank chief said the apex bank would ensure strict adherence to the statutory limit on bank lending to the Government, ensuring that the quantum of reserve money is fully backed by the equivalent gold and foreign currency reserves and maintaining a tight monetary policy stance to ensure the sustainability of the monetary anchor.

“I have said in a previous meeting that if printing money could make nations prosperous, then there would be no nation which is a Third World nation.

“We have learnt from the past that it does not help to print money. Certainly, not under my watch,” he said.

The bank would also ensure that up to 50 percent of the liquidated surrender forex receipts are channelled to support the forex market while retaining the balance to meet Government foreign currency needs.

Further, the apex bank would implement strict liquidity management to smoothen liquidity shocks that cause spikes in the exchange rate, put measures to ensure continued fostering of super demand for the local currency by the Government through the mandatory requirement for companies to settle at least 50 percent of their tax obligations for Quarterly Payments Dates (QPDs) in ZiG.

Notwithstanding the new currency arrangement, Dr Mushayavanhu said, the effective management of liquidity in the market remained key in stabilising the exchange rate and inflation.

The central bank chief said the bank would use 50 percent of the foreign currency proceeds from surrender requirements for strategic interventions in the foreign exchange interbank market.

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