While Finance Minister Professor Mthuli Ncube held a press conference announcing Ministry of Finance measures and civil service salary increments, Reserve Bank Governor John Mangudya sent out a press statement sent out an electronic press statement with the resolutions from the monetary Policy Committee’s meeting on the 24th of June 2022. We were promised concrete measures for the economic problems as ZimStat delivered more bad news with inflation flying just under 200% for June 2022. What we received was certainly a mixed bag that left us, as usual, with more questions than answers. Let’s look at the highlight of this statement.
Bank policy rate up to 200%, Medium-term accommodation rate 100%
Increasing the bank policy lending rate from 80% to 200% represents a move to tighten lending and therefore money supply in the economy. In May the government pointed at people borrowing to finance speculative activities. The proposed solution was a ban on bank lending altogether which had poor results and was quickly reversed. This move intends to make borrowing more expensive and crowd out speculators. The chances of success are slim though. If someone had borrowed Zimbabwean dollars on 1 January and was required to pay 200% per annum (so 100% for the half-year) then instead bought US dollars on the parallel market with that money their rate of return in Zimbabwean dollars would be around 218%. So 118% net (after interest costs). Food for thought. The medium-term accommodation rate was also hiked. This is a facility through which banks lend to each other to cover positions and hiking it makes it more expensive to cover bank liabilities. This move is meant to discourage broad money supply growth.
Minimum 40% interest on ZWL deposits and 80% interest on term ZWL deposits
The Governor has long bemoaned the velocity of the Zimbabwean dollar. People who are paid in Zimbabwean dollars are in a rush to exchange them for foreign currency or spend them as the currency has proven to be a poor store of value. While Zimbabwe needs higher interest rates those interest rates need to be real interest rates. Inflation is currently 191.6% placing real interest rates at -151.6% for bank deposits and -111.6% for term deposits. Hardly inspiring.
Liquidation of 25% of unutilised retained forex
We’ve seen the supposed best of the auction system. Adjustments have been made to the system. Most recently the RBZ resolved to sell only available forex. To increase the supply of available forex the RBZ auction the RBZ has put forward that 25% of retained forex that is unutilised after 120 days from the date of receipt will be liquidated at the interbank (willing buyer willing seller) rate. This effectively increases liquidation rates but this simply delays the rest of the liquidation. I guess kudos must go to the RBZ for allowing exporters to use the money before liquidating to Zimbabwean dollars.
Introduction of gold coins as a store of value
The biggest talking point is undoubtedly the introduction of gold coins as a store of value. The gold coins will be minted by Fidelity Printers and sold through normal banking channels. In theory, this is a very good move, allowing Zimbabweans a way to store value and relieving demand for US dollars. There are however some important questions that this brings up. Will the coins be real gold? Will they be legal tender for transacting too? Are we allowed to move around with them? What about security matters? How freely can we sell them back to the banks? What about the threat of externalisation? We expect these questions to be answered when we get the Statutory Instrument or Exchange control circular that will bring them into law.
Forward market for foreign currency
The introduction of a forward market for foreign currency presents an interesting dynamic for our foreign exchange markets. I like the timing as we have just had options and futures markets for equities launched. A forward contract locks in a rate, such as an exchange rate, for the future exchange of an underlying asset. This is a method of risk management or hedging. This, at least in theory, will allow those who need foreign currency in future to have some idea of the price they will pay for it. Sounds great but the other party will demand margin payments for the contract and these often factor in all considerations including exchange rate movement expectation.
What comes next?
I will be looking out for the rules and details that will bring the gold coins into law. That will give us more clarity on the characteristics of the gold coin and whether it will make sense for the citizen. We have hiked lending rates and increased foreign currency exporter’s liquidation rates before. Look to the past for answers. I’m happy to see a forward market for foreign currency but not sure it will have immediate or any impact if other things stay the same.
