By Allen Dube
The monetary policy committee (MPC) of the Reserve Bank of Zimbabwe met on the 28th of October 2021 to review the policies in light of the changing macro-economic landscape. The MPC meeting was held against a backdrop of resurging inflation, a weakening local currency and signs of a return of instability in the economy. The key decisions the MPC took where to review the bank rate from 40% to 60%, Increasing statutory reserve requirements for demand/call deposits from 5% to 10%, while maintaining the rate at 2.5% for savings and time deposits, tightening reserve money by reducing the quarterly growth in reserve money targets from 20% to 10% for the fourth quarter of 2021 and the first two quarters of 2022.
Positive interest rates
The move to hike the bank rate to 60% entails that Zimbabwe for the first time in a long while has a positive real interest rate. Positive interest rates are whereby the interest rate is higher than inflation. This is a positive and long overdue move as it will lessen speculative borrowing whereby certain individuals/entities find it fit to borrow money from banks to engage in speculative activities such as trading on the alternative market for foreign currency and stock market trading. This is likely to slow down the currency depreciation as the credit expansion will likely slow down and lessen the quantum of money circulating in the broader economy.
Positive interest rates are also a boon to banks as they will now be more willing to lend as it is now viable to do so. Positive interest rates will plausibly have banks focusing on their core mandate which is to lend and not fleece their customers by charging exorbitant bank charges, something the banking sector has often been criticized for over the last few years.
However, this move may not achieve its intended objectives as the quality and efficacy of the inflation data administered by Zimstats comes into question. The latest inflation figures, which came in at 54% year on year are dubious and do not paint a true picture of the obtaining situation. Therefore, the bank rate according to my estimates still trails inflation, which may worsen further, and this entails that the bank rate is still negative. The effectiveness of this move will be muted in my view.
The Zimbabwean economy is recovering from the adverse effects of the Covid-19 pandemic. The high bank rate will likely discourage firms which may have wanted to borrow for capital expenditure purposes, much to the detriment of the broader economy. Higher interest rates will also discourage consumers from borrowing to fund buying household items such as TVs and beds, as they will likely adopt a “wait and see” approach and wait for the cost of borrowing to go down. This will negatively affect consumer-oriented companies such as the Axia Corporation owned TV Sales and Home, whose customers usually resort to hire purchase arrangements for purchases.
Statutory reserve requirements
Reserve requirements are the amount of cash that banks must have, in their vaults or at the RBZ, in line with deposits made by their customers. Set by the RBZ’s MPC, reserve requirements are one of the three main tools of monetary policy, the other two tools are open market operations and the bank rate. The reserve requirement is key tool that the RBZ has at its disposal to control liquidity in the financial system. By raising the requirementfrom 5% to 10%, the bank is exercising a contractionary monetary policy. This action will cut liquidity and cause a cool down in the economy. This move will likely take money out of the money supply and increase the cost of credit. This entails that, Zimbabwean banks will have less to lend and therefore credit creation, which is running at 245% y-o-y will be substantially less.
In the absence of a superior monetary policy regime such as inflation targeting, which Zimbabwe does not meet the pre requisites for, the RBZ has had to target reserve money M0, which is the narrowest monetary aggregate. This has had a reasonable degree of success as it has managed to contain inflation. This is despite its rocky start in 2019 when certain “policy missteps” almost derailed the program. The decision to reduce the reserve money target from 20% to 10% is quite commendable as it will reduce the quantum of money being created on a quarterly basis. This will certainly go a long way in the quest to halt the depreciation of the currency. However, 10% on a quarterly basis is still too high in compounded terms per annum and should be much less.
Wither forex auction.
A major bone of contention over the last few months amongst economic players has been the foreign currency auction. Introduced as a replacement to the interbank market, the auction had the positive impact of stabilizing the economy and allowing entities access to forex on an official platform. However, despite a good run in the first few months, the auction has had teething problems such as a backlog which has stretched as far back as 5 months and the apex bank reneging on its promises to have the auction follow a Dutch auction mechanism. This has had industry players having to resort to using the alternative market to access foreign currency. Over and above this there has been a moral hazard associated with the auction being considered to offer “cheap” forex. It is now profitable to import products rather than producing and sourcing locally due to the exchange rate distortions that have emerged from the auction market.
The MPC took a decision to refine the foreign exchange auction system to strengthen its effectiveness as a foreign currency price discovery platform by limiting the allotments to the foreign currency available at the time of the weekly auction and paying same within two weeks from the date of the auction. This is a positive move; however, it didn’t mention whether the bank would follow the principles of a Dutch auction. The settlement period of two weeks is too long as it would cause business disruption, a T+3settlement period as suggested by CZI would have been more appropriate to allow business continuity.
The cocktail of measures taken by the MPC at its latest meeting are positive measures whose primary purposes by and large are to stem the currency depreciation. Despite looking good on paper, it remains to be seen whether they will be followed to the letter. This is because the central bank is woefully lacking in credibility as it has often reneged on previous decisions made at MPC meetings, either that or measures have been implemented halfheartedly, such as the auction. This is further worsened by the monetary authorities who seem to have a penchant for self-congratulation. It remains to be seen how effective the measures will be, but at this point the monetary authorities ought to be commended for taking bold decisions in the never-ending battle to stabilize the currency – Harare
Allen Dube is an economic analyst based in Bulawayo, Zimbabwe. He can be contacted on email@example.com/ Twitter – @allendubezw