The Reserve Bank of Zimbabwe took action to curb the increases in the inflation rate and the exchange rate against the US dollar through a press release after a meeting of the monetary policy committee on the 1st of April 2022. The resolutions include moves to increase interests rates, tighten money supply growth and relatively liberate foreign exchange transacting.
A sobering first quarter
The key indicators at the end of the first quarter of 2022 did not make for good reading. The currency gave up 27 and 24% on the parallel and official markets respectively. Inflation was already on the move back up and March figures confirmed that inflation was not only increasing but accelerating. While the influence of international inflation cannot be ignored we have domestic concerns such as money supply growth and government borrowing to battle with as well.
Above are the resolutions of the Central Banks Monetary Policy Committee and below we will translate these resolutions into simple language.
Bank policy rate up from 60% to 80%
In an economy where you could make higher returns than 60% by simply holding your money in US dollars, speculative borrowing for those with access is lucrative. Increasing the bank policy rate, the rate at which banks borrow from the central bank increases interest rates on lending and is meant to discourage speculative borrowing.
Increasing the medium-term bank accommodation facility rate
Banks borrow from each other to cover positions. For example when money transfers between banks some banks, for the short to medium term, are indebted to others. Through a function known as accommodation those debts are extended but at a cost, the accommodation rate. Increasing this is meant to ultimately slow down the movement of money between banks and in the economy.
Savings and time deposit rates up
Doubling interest rates for deposits, all other things being equal, encourages those with excess money to bank it rather than spend it or in our case buy US dollars and place upward pressure on the exchange rate. Increasing the incentive to save while slowing down the movement of money reduces the amount of money in circulation and is intended to alleviate both inflationary and exchange rate pressures.
Reducing money supply growth target
As you’ve gathered by now the amount of money available in the economy is important. When there is more money chasing goods and services you get inflation. In a multicurrency environment when the supply of one currency grows faster than the other the growing currency depreciates. The goal for the RBZ here is to slow down the rate at which the supply of Zimbabwean dollars increases. This is something the RBZ has struggled with in recent history.
Allowing foreign currency sales of under US$1000 through banks
Opening up the avenues through which those holding US dollars can sell their currency has one goal; increasing the banks’ access to foreign currency. We are not far removed from the days when the auction experienced delays in paying out US dollars purchased at the auction. The statement doesn’t give much detail on how much freedom the banks have in terms of the exchange rate but we are likely to see an arrangement similar to the one Bureau de Changes were allowed which gives them a -/+5% spread on the official auction rate of the week. However, the bank seeks to get without giving, something that has not worked out well in the past.
Ensuring commercial imports are processed through normal banking channels
Governor John Mangudya has long bemoaned that Zimbabwe’s problem has to do with the allocation of foreign currency rather than its presence. Tight exchange control regulations have not helped this and businesses have sought other channels to transact through. To the bank and governor, this means foreign currency exiting the formal banking system and as we said earlier when one currency grows in supply over another the growing currency depreciates. The reverse is true, when a currency’s supply diminishes it appreciates all else being equal. It is not clear what the Apex bank plans to do to make this a reality.
What comes next?
None of these moves are new? We have seen this to a different degree or extent in the past. In the short run, the moves to tighten the money supply of the Zimbabwean dollar result in a liquidity crunch. With money both in shorter supply and moving slower the expectation is a cool down in exchange rate and inflationary pressures. The moves to attract and retain more foreign currency which is likely to be channelled to the auction are intended to help the bank defend the value of the Zimbabwean dollar on the auction and attract large amounts away from the parallel market. Whether this will work and if so for how long we shall see. Though recent history has some hints for us.