Money printing fuelled rate volatility: RBZ chief

RBank of Zimbabwe ( RBZ) Governor,

ESERVE Dr John Mushayavanhu, this week made startling revelations by disclosing what has been at the core of exchange rate volatility in the country when he revealed the central bank had been printing money to pay for foreign currency surrendered by exporters.

Zimbabwe has had a bitter-sweet relationship with its domestic currency, reintroduced in 2019 after a 10-year hyperinflation-induced hiatus. Exchange rate volatility has been at the heart of rapid inflation increases in the past few years. At the height of inflation in 2008, authorities last reported annual inflation at 231 percent by July, but the International Monetary Fund ( IMF) measured the rate to have climbed as high as 500 billion percent.

Mushayavanhu was appointed RBZ Governor on March 28, 2024 to replace the immediate past Governor of the central bank, Dr John Mangudya, whose second tenure in charge had lapsed. The new central bank Governor’s immediate task was to find an effective formula to tame exchange rate volatility and stubborn inflation rampage, which have dogged the economy since 2019.

A lasting solution to address these twin evils was the main reason behind the delayed presentation of the 2024 monetary policy statement, as authorities scrounged for a lasting solution to exchange rate volatility dogging the economy. Among the policy measures proposed in the

MPS, which was eventually delivered on April 5, 2024, instead of January or February at the latest, was the new currency, Zimbabwe Gold (ZiG), which authorities say is backed by precious metals (mainly gold) and foreign currency. Mushayavanhu said the new currency was backed by 2,55 tonnes of gold valued at about US$ 185 million and US$ 100 million cash.

Under a market exchange rate regime, the willing buyer willing seller system would determine the exchange rate, set at ZiG13,56/ US$ 1 upon introduction of the new currency on April 5, firming to around ZiG13,34/ US$ presently. While the central bank has previously denied accusations that it printed money to pay for export surrenders, which unsettled the exchange rate and fueled inflation, new central bank chief Mushayavanhu this week openly admitted the apex bank ran the printing press to buy forex from exporters.

In an economy where the domestic currency has always been volatile, local currency prices track the movement in the parallel market exchange rate, which economic agents believe mirrors the real exchange rate. Mushayavanhu this week unequivocally revealed what he claimed was the driver of exchange rate volatility when he told legislators before the Parliamentary Portfolio Committee on Industry and Commerce chaired by Zaka South lawmaker Clemence Chudua that the bank, in the past, printed money to buy forex from exporters.

Going forward, he said the Treasury would pay for foreign currency purchases using tax collections, while it would simply debit the Treasury’s account, and keep half the forex to further build reserves and support the exchange rate. “In the past, the central bank was doing what we call quasi-fiscal operations. These involved the central bank buying foreign currency from the market and printing money to pay for it.

They also involved the central bank borrowing on behalf of the Government because the Government could not access credit. “But those things have changed now, all the (quasi-fis

QFO cal operation) obligations have been moved to Treasury, and Treasury is now taking care of the borrowings, Treasury is now taking care of the buying of foreign currency in the market, using money that they collect from taxes.

“So, there is no more printing of money by

the central bank, for those operations that I have mentioned. So, that is what is going to be done differently. “Secondly, ...the country’s reserves compared to the amount of money in circulation were no longer in sync, but his Excellency, the country’s President (Mnangagwa), in his wisdom, about a year ago directed the Treasury that going forward, the country needed to start building reserves.

“That is when he directed that royalties be paid in kind to the central bank and over the past 12 months, we have been painstakingly building the reserves. Therefore, we are now starting in a position where the reserves are more than the currency in circulation and we are just going to be building on that,” he said.

In November 2018, President Mnangagwa directed that 50 percent of mineral royalties be paid in kind, in the form of the actual mineral, for gold, diamonds, platinum and lithium as part of measures to build national reserves.

The central bank chief said the apex bank authorities, unlike the previous administration, would not increase the value of money in circulation except where this would be backed by reserves.

Mushayavanhu is on record earlier saying that the central bank would not recklessly print money as it believed that no nation in the history of economics had ever prospered from needlessly running the printing machine. He indicated that 50 percent of forex bought from exporters by the Government would be used to intervene in the market when the need arises while the balance would go towards building the reserves. Asked if the new local currency, ZiG, is redeemable given that it is backed by gold and foreign currency, Mushayavanhu said it is “transferable”, as anyone with a genuine external invoice or payment obligation could approach their bank for such facilitation.

“We cannot make ZiG convertible into gold, in other words, you come to the bank and be given an ounce of gold, that would be untenable. Also, if we allow the situation where someone would just walk into a bank and say here is 10 ZiG I want US$ 10 put in my pocket; effectively we will be dollarising the economy, and that is not what we want,” said.

The central bank chief said for the country to grow sustainably, it needed to use more of its domestic currency to transact. Currency, he said 85 percent of transactions were in forex and the balance was local currency.

“Ideally, we want to move that to, maybe 70-30 by year-end in favour of US dollars. Maybe 60-40 by next year and maybe 50-50 by 2026. That way, you will begin to see growth in this economy.

“The US dollar is a strong currency, there is no way we can sustain our economy if we are going to be using the US dollar as a transacting currency, predominantly,” he said. He said the directive that 50 percent of taxes be payable in local currency would increase demand for ZiG while the upcoming tax quarterly payment dates ( QPD) should result in the currency immediately gaining value. For a start, ZiG will not be used to pay for fuel and other key services such as passport application, Mushayavanhu said.

The central bank chief said directing all transactions in the economy to be settled in ZiG could create a liquidity crunch in an economy where there is only US$ 80 million worth of the domestic unit of account. However, authorities would gradually introduce more basic services that can be paid for in ZiG.