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Business Reporter

The ultimate goal of the Reserve Bank of Zimbabwe’s Monetary Policy Statement this week, among other things, is to achieve the key mandate of price, exchange rate and financial sector stability.

Central banks across the globe, the RBZ included, use the Monetary Policy Statement (MPS) to evaluate prior period monetary policy measures and outline the monetary policy stance and policies for the subsequent six months, including the motivation for any new policies.

The Reserve Bank of Zimbabwe (RBZ), on Thursday, issued the 2023 Monetary Policy Statement in terms of Section 46 of the Reserve Bank of Zimbabwe Act.

The MPS came at a time when monetary policy measures announced in the 2022 Mid-Term Monetary Policy Statement were bearing fruit as evidenced by a slowdown in inflation and the narrowing of the gap between the official exchange rate and the parallel market exchange rate.

Annual inflation slowed from a peak of 285 percent in August 2022 to 229,8 percent in January 2023, but this largely measures the effect of the huge spike in monthly inflation over a few months in the second quarter and part of the third quarter of last year, and will be falling very fast in the middle months of this year as the prevailing low monthly inflation rises take the place of the few months of very high rises.

The premium between the official exchange rate and the parallel market exchange rate narrowed to less than 20 percent in December, according to the RBZ.

This signifies a step in the right direction for the central bank’s efforts to stabilise both prices and the exchange rate.

To consolidate this positive direction, the central bank, through the 2023 MPS, announced a raft of new measures, and here’s how they affect you.

Downward review of interest rates

The central bank reduced the bank policy rate from 200 percent to 150 percent per annum. This measure, according to the apex bank, is meant to align with the inflation outlook which is expected to slow down further to between 30 and 60 percent by year-end in local currency terms.

The policy rate while nominally below annual inflation is in practical terms considering the low monthly inflation over the last five months effectively above the annualised inflation rate of these months, so remains strongly positive and thus still a major disincentive to speculative borrowing.

The lending rate on the Medium-term Bank Accommodation (MBA) Facility for the productive sectors, including individuals and MSMEs, was reduced from 100 percent per annum to 75 percent per annum, and that is below the expected annual inflation rate of year end.

Effectively, this means the cost of borrowing, for both current and future borrowers, has been reduced. In simple terms, it’s now cheaper to borrow now than it was before.

For businesses, it means the cost of doing business has been reduced. Lower interest rates tend to encourage spending and investment.

For individuals, lower interest rates increase household disposable income through lower interest payments, boosting consumption and savings.

However, deposit interest rates on savings and time deposits were also lowered to 30 percent from 40 percent for savings to 50 percent per annum, from 80 percent per annum for time desposits.

Lower interest rates give a smaller return from saving. This lower incentive to save will encourage consumers to spend rather than hold onto money.

Inflation to continue on a downward trajectory

In economics, inflation is an increase in the general price level of goods and services in an economy. An increase in prices inevitably reduces the purchasing power of some consumers.

In simple terms, rising prices mean your money buys you less in the future than it does today.

The good thing is that inflation is slowing down and is expected to continue on that path going forward.

The RBZ expects the downward trend in inflation to continue into 2023 as evidenced by the 1,1 percent monthly inflation in January 2023, the lowest since the reintroduction of the local currency.

Further, the RBZ expects increased use of blended inflation rates as opposed to zimdollar inflation.

Together with ZimStat, the central bank argues that blended inflation figures are more reflective of the dual currency system in the economy with more than 70 percent of transactions now in US dollars.

According to the apex bank, monthly blended inflation is expected to average below 1,5 percent in 2023.

Annual blended inflation is expected to decline progressively to reach 10 percent-30 percent by year-end. While these figures are still high, they are much lower than peak levels.

Stability in prices allows both businesses and individuals to save and plan for future consumption and investment.

Exporters to keep more of forex earnings

How much exporters keep from their export earnings has been contentious since 2019 when the local dollar was introduced.

Finally, the central bank has heeded calls from the exporting community for an upward review of export earnings retention thresholds.

According to the MPS, export retentions have been increased and standardised at 75 percent across all sectors, including firms listed on the Victoria Falls Stock Exchange (VFEX).

Further, foreign currency retention on domestic sales in foreign currency has been increased to 85 percent. In simple terms, exporters have got to keep more of what they earn.

Before this, most exporters were keeping just 60 percent, while retentions for domestic sales were at 80 percent.

Confederation of Zimbabwe Industries (CZI) president, Mr Kurai Matsheza said the adjustments were a welcome relief for members.

“We have been engaging authorities regarding these issues and we are happy that the governor has listened to us,” he said. “Yes, we might have wanted more, but the increase in retention ratios is a very positive development, together with the reduction of interest rates.”

Zimbabwe National Chamber of Commerce (ZNCC) president, Mike Kamungeremu praised the authorities with regard to export earnings retention thresholds.

“We welcome the development,” he said. “Although we wanted more, we applaud the governor for listening as we were lobbying for such a move because our members were affected. From the exporters’ side where the biggest gain is we will see more investment in the sectors they operate in.”

According to Mr Kamungeremu, the surrender portions were bigger and with the parallel market moving, it did hurt their members.

“With the parallel market moving, our exporters felt they were surrendering at a discounted rate and expenses being charged at the former, this erased profitability,” he said. “So some of our exporters had either stopped exporting or reduced their exports.”

Mr Kamungeremu said the increase in retention ratios meant an increase in money to spend and reinvest at no discounted rate.

More money to invest means more jobs can be created.

How the RBZ plans to deal with the exchange rate challenge

As highlighted earlier, the RBZ’s key mandate is to achieve price and exchange rate stability. The challenge is not insurmountable though. The RBZ has come up with additional measures to consolidate what was achieved last year.

The Willing-Buyer Willing-Seller arrangement, seen in the interbank market, will be strengthened with the RBZ availing foreign currency to banks and Bureaux de Change from the surrender portion of foreign exchange receipts.

The foreign currency will be sold to banks and Bureaux de Change through an auction on a wholesale basis.

Moreover, the interbank rates and the auction system will, thus, continue to complement each other with the willing buyer-willing seller acting as the interbank exchange rate, while the auction system continues as a foreign currency re-distribution mechanism to gauge foreign currency demand in the economy.

The move, hopefully, will result in improved access to foreign currency. Most importantly, it will refine the growing use of market-determined foreign exchange rates.

A full market-driven exchange rate will remove all the distortions that have characterised the exchange rate, leading to both price and exchange rate instability.