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    ZIMBABWE| Unpacking the Recent Monetary Policy Developments

    By Yona Banda

    On a day with an ominous history, Zimbabwe’s key economic authorities enacted an apparent rescue package for the faltering economy. The announcements come after a surge in inflation, with the government’s estimations placing annual inflation at 191.6% and month-on-month inflation at 30.6% for June 2022.

    The key highlights from the measures enacted;

    By the Minister of Finance and Economic Development

    General Policy

    Ø  The government will maintain the multi-currency system and use of the US Dollar for a period of five years.

    Ø  The interbank rate will be determined by banks on a willing buyer and willing seller basis. All economic transactions will be mandated by law to follow this exchange rate and US dollar discounts may be punishable by strict civil and criminal penalties.

    Ø  The government has reduced the fuel levy on Diesel to 0 and significantly it for petrol to prevent prices from breaching US$2.00

    Ø  The government should release 20,000MT of wheat per month for the next three months at an import parity price aligned with the interbank rate US$680 per MT. Millers are expected to import 70,000MTs of wheat during the same period.

    Ø  The government will immediately release 7,000MTs of outstanding maize allocations to millers. The government will also release 25,000MTs of maize to millers as part of  a “swap” deal. In addition to that, the government will also deliver 27,000MTs of maize from strategic grain reserves to millers at a price of ZWL$75,000 plus US$90 per tonne at the prevailing interbank rate.

    Civil service Policies

    Ø  Reaffirming the 100% rise in civil service salaries with effect from 1 July 2022.

    Ø  The government will provide various allowances for workers employed in the health services sector

    Ø  Provision of institutional housing for Harare and Bulawayo based health care workers.

    Ø  Payment of school fees for up to 3 biological children of teaching households capped at ZWL$20,000 per child per term.

    Ø  The provision of 34,000 institutional housing units for teachers within or outside school premises over the next five years.

    Ø  The provision of guaranteed housing loan schemes for civil servants.

    By the Reserve Bank Governor

    Ø  The bank policy rate is increased from 80% to 200% per annum.

    Ø  Increasing the Medium Term Accommodation interest rate from 50% to 100% per annum;

    Ø  Increasing the minimum deposit rate for ZW$ savings from the current 12,5% to 40% per annum and increasing the minimum rate for ZW$ time deposits from 25% to 80% per annum; and

    Ø  25% of the unutilised export receipts shall be liquidated at the willing-buyer willing-seller exchange rate after 120 days from the date of receipt of the export proceeds.

    Ø  The introduction of gold coins minted by Fidelity printers for the public to purchase.

    Ø  Plans to introduce a market for forward exchange rates

    Analysis

    The take on the developing situation is that reduced economic activity from COVID-19 and the cash injection from the SDR allocation enabled the brief period of exchange rate stability experienced in 2021. Since the return to normal levels of economic activity the capacity of the foreign auction to meet demand has decreased. Subsequently, the parallel exchange rate has rapidly lost value. The resultant inflationary pressure has been exasperated by external shocks from rising global food and energy prices. This has put the government in the awkward position of having to simultaneously address the rising civil discontent and the deteriorating currency situation. Hence the dichotomy between taking a course of tight monetary policy whilst committing to increased recurrent expenditures.

    The most pertinent decision was the declaration of the interbank rate as the sole legal USD pricing mechanism. The big selling point for the shift is that the rate will be determined on a “willing buyer, willing seller” basis. The move alludes to the government ceasing its mission to control price levels through the auction exchange rate. Given that retail prices are already largely aligned with the parallel exchange, it is possible that a short-term rate parity could be achieved without causing too much chaos. Long-term, the problem is that there is no telling where the floor lies for the ZWL. This might explain the interest rate hike, as a means to effectively reduce liquidity. However, there is the unanswered question of how the new commitments to civil service will be financed without creating more liquidity. As the economy’s largest forex supplier, there would be scope for the government to contain the interbank rate. However, that would just be a reversion to the auction setup where the prevailing rate is rendered meaningless because it is inaccessible to the economy at large.

    The bottom line is that it is difficult to envisage an outcome where this set of measures have a long term stabilizing effect on the economy. There is a scenario where the interbank reaches parity with the parallel rate in the short term. However, the strong incentive for the government to maintain the semblance of economic stability and progress leading into 2023 will likely lead to increased liquidity. As a result, the exchange rate devaluation will continue – possibly at an accelerating rate – Harare

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