Major expectations from upcoming monetary policy
The Reserve Bank of Zimbabwe (RBZ) is expected to present the first monetary policy statement of 2022 within the next 30 days amid rising inflationary pressures. The monetary policy comes after the deferment of the first foreign currency auction from January 11 to 18, with the spotlight falling on commercial banks to improve due diligence on the vetting of auction submissions.
There have been widespread reports of abuse of the auction system through inflation of foreign invoices, generation of fake invoices, double dipping by businesses trading exclusively in foreign currency and diversion of foreign currency proceeds to the parallel market.
The last two months have seen significant price increases for fast moving consumer goods and services due to heightened demand during the festive holidays and depreciation of the Zimbabwean dollar on the open market. As a result, the month-on-month inflation rate for December 2021 was 5,76%, down from the November 2021 rate of 5,80%. However, annual inflation increased from 58% in November to 61% in December last year.
Inflation beating forecasts
Annual inflation beat all the central bank forecasts. The forecast was raised more than twice in 2021 from the initial below 10% target at the beginning of the year to 25%-35% range mid-year and finally 53% in the last quarter of the year. At the core of the increase in inflation is agriculture commodity payments and payments to firms contracted in various infrastructure projects. Annual inflation is largely expected to trek upwards as the country enters the election season which will likely result in unbudgeted increase in agriculture subsidies (money supply growth) and increased demand for foreign currency in the market.
Auction allotments in 2021
Last year, the auction platform allocated US$1,971 billion to local businesses and individuals with 62% of the amount going towards importation of raw materials, machinery, and equipment. This has significantly helped the local industry to stay competitive in the face of increased importation of manufactured commodities from South Africa, China, and Singapore.
However, a worrying trend is on the subsidisation of imports for finished consumables, processed food, beverages, agriculture and industrial chemicals, electrical and hardware tools, paper and packaging material which should ordinarily be produced locally. This means that the government is sabotaging its own import substation policy and thwarting any efforts by industry to manufacture these products in the country. Policy misalignment has been one of Zimbabwe’s key challenges to industrialisation and it remains to be seen if the central bank will continue to allocate foreign currency to importers of products that can be produced locally.
Auction bottlenecks
Out of the estimated imports of US$5,4 billion (excluding smuggled merchandise) last year, 37% of the funds were sourced via the auction system using the central bank pegged rate. However, there have been delays in the settlement of winning bids with backlogs running more than 10 weeks and a backlog of approximately US$270 million as of November. This means that the auction system is failing to satisfy formal demand and there are billions of Zimbabwean dollars which get tied up for months to settle allotted foreign currency.
These backlogs provide a lifeline to the parallel market as businesses must augment auction allocations and meet production timelines. The spread between the pegged auction rate and open market rate continues to widen with the former at US$1:ZW$108,66 while the latter is trading at US$1:ZW$220. The spread creates a fertile ground for market instability through price distortions and unrealistic forward pricing on future payments. The spread also means that millions in foreign currency continue to circulate in the informal sector since the formal exchange rate does not reflect the accepted free market dynamics.
Managing inflation
The central bank deserves credit for recalling its core mandate of reducing inflation last year. During the same time in the prior year (January 2020), annual inflation was hovering above 363% and the economy was very volatile. The reduction in money supply growth (and inflation) has brought some measure of stability, even though inflation remains high if compared to Zimbabwe’s peers in Southern Africa.
The Sadc annual inflation average (If Zimbabwe is factored out) is less than 10%. Zambia ended the year with annual inflation of 16,4%, while Mozambique and South Africa closed at 5,7% and 5,5% respectively. These regional countries have not implemented any rocket science monetary policy regimes, they are simply being prudent on money supply growth and aligning interest rates to annual inflation rates.
Locally, the central bank will have to devise ways to keep inflation in check in the face of increased funding for agriculture inputs, infrastructure projects and commodity payments ahead of next year’s harmonised elections.
Any significant increase in local currency money supply growth will add unprecedented pressure on foreign currency, given the low levels of confidence in the Zimbabwean dollar and complete redollarisation of the economy.
Interest rates
The apex bank is largely expected to maintain its benchmark interest rate at 60% as a way to continue reigning in on speculative borrowing and money creation. The central bank last increased interest rates from 40% to 60% in October last year. The current environment encourages speculative borrowing with lenders certain to make losses on issued loans due to anticipated depreciation of the local currency. The bank will likely adjust the interest rates quarterly in line with inflation trends.
Foreign exchange regulations
The central bank will undoubtedly maintain the current foreign currency retention levels of 60% to the exporter and 40% to the bank due to increased demand for foreign currency to service its external debt and oil the auction market which is being regularly questioned. Miners and tobacco producers have been frantically pushing to have the retention levels increased to at least 80% to no avail. The central bank has been offering incremental export incentives to exporters and will likely play the same card to fend off current demands from exporters.
Transaction limits
In August 2021, the central bank reviewed mobile money transaction limits from
ZW$5 000 per day to ZW$35 000 per week after an outcry from merchants. The limit on mobile money for sending money is ZW$5 000 per transaction, while the ceiling for both mobile money and Zipit remains at ZW$20 000 per transaction in a single day.
The bank may maintain these limits with the prevailing cap of ZW$5 000 per transaction largely in sync with maximum tax collections from the Intermediated Money Transfer (IMT) Tax by treasury.
The central bank is unlikely to ruffle feathers considering the benefits of relative price stability enjoyed from July to the end of last year. The taxpayer has picked the tab on the central bank debt of US$3,3 billion in blocked funds, leaving the central bank with more room to contract more debt (borrow externally) and avoid implementing reforms that ensure free market price discovery on the foreign exchange market. Similarly, the central bank will play deaf to any calls to implement a true Dutch Auction system where amounts to be auctioned are known beforehand and settlement is done within 48-72 hours.
Currently, the bank is auctioning foreign currency which is not available thereby perpetuating the backlog and giving a lifeline to the parallel market. The market will be tempted to believe that there is some formula to the policy flaws.
Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.