There’s been a lot of activity in the Zimbabwean monetary space lately. Some are more meaningful than others of course. Despite a lot of talk and public gesturing the parallel market exchange rate has continued its ascent. Piecemeal directives and orders have addressed symptoms and little else. The increase in both month on month inflation to a 13-month high and a second consecutive month of acceleration in the year on year inflation seem to have pushed the Central Bank and its Monetary Policy Committee into meaningful action. The latest meeting held Thursday the 28th of October produced 13 measures that the bank will pursue to manage the monetary space. It’s quite a long one, longer than we have seen in a while and there are some very interesting highlights to pick from it.

Press-Statement—MPC-Resolutions—28-10-2021

Highlights

  • The bank policy rate increase to 60%, forcing banks to increase the cost of lending.
  • Banks will be required to keep 10% of their depositor in reserve
  • Increasing minimum deposit interest rates to 7.5% for savings accounts and 20% for term deposits.
  • Reducing quarterly reserve money supply growth target to 10% down from 20%
  • Allotting only money that is “presently available” at the date of auction and paying it within 2 weeks of the auction.
  • Introducing mobile Bureau de change branches to increase accessibility to the official auction rate.
  • Promoting the use of electronic wallets to receive foreign currency purchased from BDCs, not cash.
  • Allowing individuals a once per month purchase of US$100 through the BDC system.
  • MSMEs are allowed to purchase US$500 per month
  • Retail pharmacies are allowed to purchase US$5000 per month

Let’s look at a few talking points from these highlights;

Contractionary

Zimbabwe Reserve Money

Increasing the bank policy rate makes lending more expensive and discourages speculative lending, at least that’s the goal. Requiring banks to keep more money means they lend less money. Increasing deposit interest rates is meant to give money, Zimbabwean dollar money more purpose and encourage people to save in Zimbabwean dollars rather than dump them for the greenback at their earliest convenience. If you put 2 and 2 together the moves by the RBZ are contractionary, they seek to reduce the amount of Zimbabwean dollar money in circulation available to demand US dollars. As the graph above clearly shows basic money supply or reserve money has been on the rampage in 2021.

Cash auction but why wait 2 weeks?

Business and analysts have called for the auction system to only allot available foreign currency to bidders at the auction every week. The good governor and his team have pledged to do this to avoid the up to 6-week backlog that has been experienced in the system. This move means we are likely to find a more realistic exchange rate but why would we wait two weeks to pay bidders if we are allotting what’s already available?

BDCs in the streets

The measure was first talked about last week and it seems to be getting legs to run with this MPC resolution. I for one like this measure, let’s look at it closely. It’s one thing to tell people you have cheaper US dollars but ultimately meaningless if your cheaper US dollars are inaccessible. The move does what the Central Bank should be doing, going where the people are. However, the bank may find the memories of Zimbabweans too long for the next measure.

Electronic US Dollars? Been there, done that!

It was October 2018, just 3 years ago when Finance Minister Professor Mthuli Ncube dropped the bomb on us confirming what we all knew and feared. There was a difference between the US dollars in our bank accounts and cash US dollars. So this move towards electronic wallets for US dollars purchased from mobile BDCs will understandably be met with apprehension. Couple this with the auction waiting 2 weeks to pay money they say they have ion hand and you start to see a discouraging pattern.

US$100 once a month

Allowing individuals to purchase US$100 through the BDC system once a month should be interpreted as a positive move. Hopefully, it’s the result of the governor and his team addressing the needs of Zimbabweans who want to protect their hard-earned money from inflation. It’s not clear whether this is an additional US$100 (making the total per month US$300) or this increases the purchase amount in one of 4 weeks to US$100 (making the total US$250 per month) but looking at the plain meaning of the works it looks likely to be the latter.

MSMEs and pharmacies brought in from the cold

Finally allowing MSMEs and pharmacies access to foreign currency at the auction rate is a welcome move. Pharmacies have long complained of lack of access to foreign currency and have been notable in using the highest conversion exchange rates when pricing in Zimbabwean dollars. MSMEs are the bulk of formalised business and they have also been heavily involved in parallel market rate pricing because of a lack of access to the auction system. We have many times noted that the auction system cannot be effective in reducing exchange rates without being inclusive. This goes some way towards addressing that.

What’s next?

Monetary contraction is never an enjoyable experience and we should not expect it to be this time around. It has a lot of knock-on effects that will surely be felt in business and even investment circles. The attempts to increase the inclusivity of the auction should be applauded though the two-week delay in payment of winning auction bids and the move to give individuals electronic US dollars should be questioned with the same energy. The 20% per quarter reserve money supply growth per quarter was ambitious at best, so I’m not sure what to call the 10% target. All this as we prepare to receive the 2021 budget from the Ministry of Finance, will contractionary measures help our push for economic growth targets?