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Golden Sibanda

THE Reserve Bank of Zimbabwe (RBZ) has further reduced its quarterly reserve money (cash available for use in the economy) target, cutting it to 7,5 percent from 10 percent.

The measures are part of a cocktail of existing and new tighter policy interventions to contain increases in prices of goods and services as well as stabilise the local currency.

Staying true to its promise of maintaining a hawkish rather than dovish monetary policy, the bank tightened screws on the amount of money in the economy and left interest rates a bit elevated, to discourage speculative borrowing.

RBZ Governor Dr John Mangudya said in his 2022 monetary policy statement released yesterday that a tight monetary targeting framework would remain in place this year.

Economists said the monetary policy was more about staying the course, tightening and improving the current policy measures, which have been working well.

Others however, said more should be done to address Zimbabwe dollar depreciation, which has lately stoked inflation, resulting in authorities slightly missing annual targets.

Dr Mangudya said the latest measures were aimed at sustainably anchoring inflation expectations and curtailing the speculative demand for foreign currency, which has exerted pressure on the value of the local currency exchange and driving prices higher since the last quarter of 2021.

The measures come against the backdrop of a resurgence of rising prices of goods and services, especially at the end of 2021, which saw annual inflation rate closing the year at 60,7 percent against a target of 58 percent.

Dr Mangudya said the inflation surge was mainly as a result of the parallel exchange rates’ pass-through effect on domestic prices that continues to bedevil the economy.

“To achieve this, the bank has, with immediate effect, reviewed downwards the quarter-on-quarter reserve money target from 10 percent to 7,5 percent for the quarters ending March and June 2022, which target will be reviewed thereafter,” Dr Mangudya said.

The quarterly reserve money growth, amount of money in the economy, target for 2021 was progressively reduced from 22,5 percent during the first two quarters of 2021 to 20 percent in the third quarter, and further down to 10 percent in the fourth quarter of the year.

Dr Mangudya said the downward revision of the amount of cash circulating in the economy was necessitated by the need to further tighten monetary policy in response to resurgence of inflation (price increases) and loss of value of the local currency.

He said the revised quarterly reserve money growth target was consistent with the envisaged economic growth rate of 5,5 percent in 2022 and then expected year-end inflation of 25-35 percent.

Zimbabwe has made significant progress in containing inflation since July 2020, when it introduced the foreign currency auction system.

As a result, the annual inflation rate declined from a post dollarisation peak of 837,5 percent in July 2020 to 50,3 percent in August 2021.

The governor said successive revisions in quarter-on-quarter growth targets, to contain inflation and stabilise domestic currency, saw reserve money being reduced to $25,49 billion as at the end of December 2021, well within the fourth quarter target of $28,9 billion.

Quarter-on-quarter reserve money growth fell by 1,14 percent, against a target of 10 percent, despite the once-off increase in statutory reserves following the upward revision of the statutory reserve requirement ratio for demand/call deposits from 5 to 10 percent.

The central bank chief said the bank would also continue with its aggressive liquidity management policy by aligning its Open Market Operations (OMOs) to liquidity injections by Government.

The strategy is meant to avoid excess liquidity in the banking system emanating mainly from payments for infrastructural development projects, which may fuel money supply growth and destabilise the exchange rate.

In view of the set stringent monetary targets, Dr Mangudya said a tight liquidity management framework was adopted, which resulted in average monthly bank balances at the apex bank declining from $12,6 billion in December 2020 to $3,6 billion in December 2021.

The desired liquidity levels in the market were largely achieved through the issuance of Non-Negotiable Certificates of Deposit (NNCDs) introduced in June 2021.

In this regard, Dr Mangudya said the bank discontinued the issuance of the 7 percent Savings Bonds and OMO bills. The outstanding stock of NNCDs as at December 31, 2021 was $37,6 billion. 

In order to avoid further build-up of inflationary pass-through effects emanating from pegging prices in line with black market rates and the elevated global price increases, the RBZ policy rate and the Medium Term Accommodation (MBA) Facility interest rate were maintained at 60 and 40 percent, respectively.

The bank also left statutory reserve requirements for demand/call deposits and savings and time deposits unchanged at the current levels of 10 percent and 2,5 percent, respectively, to promote savings and time deposits, while discouraging unproductive credit creation.

Economist Persistence Gwanyanya said the monetary policy statement was more about staying the course, getting the economy back on rails, refining policy measures and strengthening the auction system.

“It is in recognition that the policy thrust is a sound one for the country and just needs to be refined,” said Mr Gwanyanya, an economist and member of the monetary policy committee.

 He said the bank had maintained a hawkish or tight monetary policy framework, which saw reserve money base coming within target. The bank also kept the policy rate at 60 percent and the medium term facility interest at 40 percent.

“We are of the view that the interest rate regime is important to deal with speculative tendencies. Statutory reserves have also been maintained at the same levels . . . for demand call deposits.”

Mr Gwanyanya also applauded pronouncements by central the bank that it was in support of measures by Treasury to promote the use of local currency

Economist Eddie Cross said the measures in the monetary policy were insufficient to deal with the volatility of the currency, suggesting the RBZ should allow the market to freely establish equilibrium.

“I think the (RBZ) analysis is quite wrong, I think the real problem here is the parallel market rate, that is what is driving the depreciation of local (Zimbabwe dollar) salaries. I think the only real solution is full liberalisation; let the currency find its one level,” he said.