Reserve Bank of Zimbabwe Dr John Mangudya presented a mid-term monetary policy document on the 13th of September 2019. Among the highlights of the policy are a US dollar savings bond, addressing the cash situation and a little more detail on the money supply targeting. The nation currently has many economic problems to deal with and the monetary system continues to be right in the thick of it. We’ve seen fuel stations and mobile money providers caught up in a storm over cash issues. Last week the Zimbabwean dollar reached parity with the Rand briefly on the parallel market before surpassing it.
Inflation too has continued it’s close relationship with the currency exchange rate even though the Governor claims it has been brought under control. In spite of the government choosing to shy away from publishing the year on year inflation rate citizens feel the inflation rate on a daily basis. The new cocktail of measures to reign in the parallel market and bring sanity to the monetary situation are as follows;
USD savings bond
The introduction of a US dollar savings bond that will carry 7.5% interest per annum is proposed as a move to offer value to those holding US dollars. A smart move by the Reserve Bank considering that peoples only other option with US dollars was to sell them for Zimbabwean dollars. While withdrawals are permitted the lack of cash even in US dollars has left many unable to access their Nostro account balances. The reserve Banks track record with US dollar deposits may not augur in their favour, however.
Cash for Banks RTGs balances
The cash situation was also looked at by the Governor who stated they would introduce cash to the market to alleviate cash shortages. The notes would not add to the money supply as banks would access cash from the reserve bank based on their RTGS balances. While the move sounds good the sincerity is questionable. This solution has been available for a very long time but was never utilized or even attempted. Why now? Also, the cash cow that the Intermediated Money Transfer Tax has been for the government of Zimbabwe it is highly unlikely that they would kill the goose that lays the golden eggs.
RBZ to encourage long term lending
The short-termism witnessed in our contracting lending markets was not ignored by the Reserve Bank this time around. Due to economic contraction lending has become tighter and with a shorter-term view due to high inflation and its effect on the time value of money. The Governor announced that the RBZ would allow banks to borrow against outstanding assets (loans) with durations extending beyond 2 years. In theory, this is a noble idea however considering annual inflation was last measured at over 200% this is unlikely to be attractive unless the rate they borrow at offers advantages compared to the rate they lend at.
Tier 1 banks require $200 million capital
Tier 1 banks have had their capital requirements adjusted to match the economic situation. They will now require ZWL$200 (US$16 million at interbank rate). Other bank capital thresholds remain unchanged until a review will be conducted next year.
Overnight rate up to 70%
The lending rate has again been increased from 50 to 70% as the bank continues to fight speculative borrowing that was channelled towards the purchase of foreign currency. The increase was of course necessitated by the shift in exchange rates which had washed away the deterrent effect of the 50% interest rate.
Broad money supply around 15 bill
Perhaps the most interesting highlight to those following the currency situation would’ve been the money supply revelation. Registering a 57.51% growth in money supply year on year to May 2019. According to the reserve bank, this expansion was caused by translation of foreign currency accounts after switching to the (then) RTGS dollar as the unit of account. The graph presented suggests a much more steady rate of growth than a 1-time jump, however. The governor has pointed out that they will be using money supply targeting, a process through which the reserve controls exchange rates by tinkering with the supply of domestic money on the market. Essentially what they have been doing all along if critics who point out the Money supply problem are to be believed. The idea is to manipulate the supply of local currency in the market to push the exchange rate in the desired direction. This is achieved by using short term securities to either reduce or increase liquidity on the market. In layman’s terms, they would offer high-interest deposits to take cash off the market and sell them off to put cash back on the market depending on their goal.
Another monetary policy has come and gone and one can help but feel that the overall reaction to this policy was underwhelming. Our economic problems are many and contrary to popular belief we did not get where we are because of one big mistake but rather a series of many unfortunate small ones. So small measures are needed to gradually normalise the situation. However, the monetary policy seems short on dealing with peoples real issues and rather disinterested in fixing the mess. The policy is unlikely to change much as it stands.