Monetary policy 2021 review
ON February 18, the Reserve Bank of Zimbabwe (RBZ) released the 2021 Monetary
Measure
The bank adjusted the Bank policy rate for overnight lending from 30% to 40% and the medium term lending rate for the productive sector from 25% to 30%.
lComment
The Bank policy rate was last adjusted in November 2019. The rate adjustment was from 70% to 35%, its biggest adjustments to date.
From November 2019 to the February 2021, the rate had been unchanged at 35%, before the current adjustment to 40%. Normally, the lending rate for the productive sector follows a similar direction to the overnight rate, but stays below the latter.
The implication of an upward rate adjustment is tightening of liquidity in the market and in this case, local currency liquidity. The measure is typically designed to discourage speculative borrow
Measure
Policy Statement, whose theme was Staying on Course in Fostering Price and Financial Sector Stability. Below is a summary of the key measures introduced and Equity Axis’ commentary on respective measures: ing by making the cost of borrowing more punitive.
We see the move as an admission by authorities that the currency has not yet stabilised. The rate at which the local unit is losing ground on the formal market is steepening and a huge cause for concern. A wider gap between the formal and informal exchange rates also points to a currency instability risk over the short term. Buttressing these fears is the growth in base money supply. Reserve money supply growth over the last eight months has been higher than targeted and unsustainable, thus driving ZWL$ liquidity disproportionately up.
l Increased statutory reserves from 2,5% to 5% for demand/call deposits; and l Maintained the statutory reserve for time deposit at 2,5%.
Comment
Statutory reserves refer to the amount of cashflows that, in the instance of bank, are supposed to be kept as reserves and not loaned out. These cashflows are a percentage of the total deposits held by a banking institution.
Increasing the statutory reserve ratio thus implies reduced pool of loanable funds.
The implication of the measure on the net is to reduce the funds at banks’ discretion that could further be extended as loans to the private and public sectors. Again this measure is a demonstration of currency fragility as it comes on the backdrop of increased interest rates. Given a lower than average loan to deposit ratio sitting way below 40%, the Bank could have been expected to design measures that stimulate lending, but the challenge here is an unstable currency which the Bank feels should be dealt with foremostly before the economy kicks off.
Targeting the demand deposits is also a measure to promote long term lending, particularly capex to industry. This however only works where currency stability is guaranteed.
Measure
lReduced quarterly Reserve Money growth target from 25% to 22,5% per quarter.
Comment
Reserve money refers to the currency in issue and banks deposits held by the RBZ. It is the most sensitive component of total money supply. A growth in reserve money while all else is stable, can potentially exert pressure on currency stability.
Reserve money is high powered and once released it can cause a shock to monetary stability. Its growth therefore needs to be guarded. In 2020 reserve money grew by 113% which deduces to a quarterly CAGR of 21%. While the bank said it was able to beat a targeted quarterly growth of 25%, the statement was far from the truth. In its 2020 MPS the Bank set an annual reserve money growth of between 10% to 15%.
Measure
It was only after an underwhelming 44% quarterly growth in Q1.20, did the Bank revise its quarterly targets. It becomes meaningless to keep setting targets that are constantly revised in line with performance, where the former that should guide the latter. But this is not the real challenge. The real challenge is that the achieved growth of 21% was very inflationary.
Annual inflation climaxed at 830% in August, against this escalated growth in reserve money. While the Bank said it was Ponzi schemes perpetuated by mobile money services, it bothers the mind to realise that the Bank expects a similar growth in money supply without the same forces in action, save for improved economic activity.
l Increasing cash withdrawal limits to ZW$2000 from ZW$1000. l Introducing new ZW$50 note
Comment
Increasing the withdrawal limits increases depositors’ convenience. The lack of ZWL cash notes has contributed to the proliferation of parallel rates which are quite steep. The country still highly relies on cash service such as in transportation and goods markets in low income areas. Given a skew of the population in favour of the rural areas, it follows that reduced access to cash inhibits trade and increases the cost of goods and services as consumers are penalised for failing to access cash. This has an impact on equity and general economic growth.
The challenge with Zimbabwe is the
Measure
Maintaining and sustaining the auction system through the 40% export surrender requirement, 20% domestic foreign exchange sales proceeds surrender requirement and 15% foreign exchange contribution from the fiscus.
lComment
The auction system has significantly increased availability of foreign currency to companies in need of funds. Companies releasing their latest financials are highlighting that both production and sales levels have improved since the revamp of the auction system in June 2020. The daily average traded on the interbank has increased from about US$15 million in June 2020 to US$30 million in January 2021. Companies have been able to source inputs for production as well as settling foreign obligations.
There is a visible direct relationship between forex availability and production in the economy. The interbank market has also helped cushion the exchange rate di
low notes and coins ratio to total deposits, which sits below 5%. It means only 3%5% of total deposits in the economy can be utilised as cash, thereby dragging business.
The figure is slightly higher after factoring the US dollar cash in circulation. We do not anticipate that the move to increase withdrawal limits and to introduce higher notes denominations will cause inflation. In fact, we would have hoped for a cash withdrawal of at least ZW$5000. Either way, issuing higher denominations does not cause inflation unless the Bank fails to debit (cancel) out the RTGS balances being replaced. rectly, while level of ZW$ depreciation has significantly subsided since its consummation. Outside of all the above positives we still believe the rate has not yet stabilised and that the IBM is not yet as perfect in forex allocation and the pursuit of price discovery. The Bank still retains more control of the market through surrender requirements and this results in a distorted overvaluation of the local currency. A wider variance between the official and the informal exchange rate points now sitting at 40% points to a failing market.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net.