Storms calm as govt ends overdraft binge

THE Reserve Bank of Zimbabwe (RBZ) says reserve money growth beat a targeted 25% last year to end at 18% after government stopped raiding the apex bank for overdrafts to fund its excessive expenditures.

Money supply refers to all the currency and other liquid instruments in an economy on the date measured, including cash and deposits that can be used almost as easily as cash.

Government’s overdraft binge had been blamed for igniting excessive money supply growth in the economy for many years.

In turn, this piled pressure on the currency and underpinned an inflationary rage that affected economic growth before a public outcry forced Finance minister Mthuli Ncube to apply brakes.

In his monetary policy (MPS) statement released on Thursday, RBZ governor John Mangudya said his forecast-busting money supply strategy was supported by a tight mop-up regime executed through open market operations (OMO) during the period.

In a way, the central bank’s interventions calmed the volatile markets after pushing annual inflation down to 348% in December, from 837% in July.

But inflationary pressures returned in January 2021, when the yearly rate increased to 362%, according to statistics contained in last week’s MPS.

However, the central bank chief was proactive, unveiling an MPS that will be devoted towards fighting inflation and exchange rate volatilities.

“The bank has continued to successfully implement a conservative monetary targeting framework in order to contain money supply growth, reduce pressure on the exchange rate and stem inflationary pressures in the economy,” the RBZ governor said.

“In this regard, the bank achieved a conservative quarterly growth in reserve money of 18,6% in 2020, against a target of 25% per quarter. Containment of reserve money way below the set quarterly targets is attributable to the bank’s active mopping-up programme through open market operations and the strong fiscal consolidation measures that have seen government completely refraining from resorting to the overdraft window at the central bank.

“As at end of December 2020, reserve money was $18,76 billion, compared to a year-end target of $25,20 billion. In line with its conservative monetary targeting framework, the bank escalated its open market operations from October 2020 by aggressively mopping up excess liquidity through the issuance of short-term open market operations savings bonds at 5% per annum interest.

“As at December 31, 2020, the outstanding OMO savings bonds stood at $14,1 billion, representing significant amounts of sterilised excess liquidity. The OMO savings bonds complemented the existing 7% savings bonds with tenor ranging from one year to five years and a 30-day rediscount window.”

The RBZ forecast annual inflation to plummet to less than 10% this year, driven by a good agricultural season and fiscal and financial sector stability.

In December, Ncube had projected annual inflation to fall to 136% at the end of 2021, after volatilities pushed the rate to 837% in July before declining to 348% in December.

But an inflation rate of less than 10% appears overly optimistic given the headwinds that still confront Zimbabwe under the COVID-19-induced lockdowns, which have knocked demand, industrial output and company revenues.

Basic commodity prices have rocketed since the lockdown was announced in January, shooting by more than 20% in some key products, and driving up the annual inflation rate to 362% in January.