‘Economy poised to persist in pseudo-dollarised state’
OPINION in Zimbabwe has been divided following last Friday’s monetary policy statement. In an analysis below, Inter Horizon Securities looks at what the MPS means to Zimbabwe:
e Reserve Bank of Zimbabwe delivered the highly anticipated 2024 amidst a multicurrency system characterised by exchange rate and inflation volatility.
roughout 2023, the central bank maintained a tight monetary policy stance typified by high interest rates, stringent liquidity management and management of foreign exchange to foster price and exchange rate stability.
Regardless, the prospects of the local currency remained under pressure due to exchange rate and inflation volatilities.
Although the parallel rate premium was maintained below 30% for the greater part of 2H23 (second half of 2023), the trend reversed, with the premium widening to above 50% in December and January, driven by excessive demand for foreign exchange.
Money supply dynamics
Local currency constituted less than 20% of total money supply, reflective of the level of dollarisation of the economy. Reserve money stock stood at ZW$2,02 trillion as at December 2023 from ZW$1,06 trillion in June 2023, reflecting ZW$748,44 billion expansion in statutory reserves.
Statutory reserves were bolstered by the change in reserve requirement ratio and growth in the deposit base, resulting in statutory reserves constituting 98% of total reserve money. Broad money stock was ZW$18,87 trillion as at year end from ZW$14,27 trillion in June 2023 due to expansion in transferable deposits.
e RBZ attributes the 708,87% year-on-year growth in broad money stock to a surge in foreign currency deposits in the banking sector, which was supported by steady foreign currency receipts. As at year-end, foreign currency deposits, local currency deposits and local currency in circulation constituted 83,01%, 16,94% and 0,05% of money stock, respectively.
By January this year, money stock stood at ZW$29,25 trillion, a 55% surge on the year-end figure, attributed to the impact of exchange rate movements.
Banking sector performance
e RBZ notes that the sector experienced general stability in the face of shocks emanating from a dynamic operating environment. Increased confidence in the sector was evidenced by sustained growth in foreign currency deposits in correspondent banks from circa US$400 million in 2018 to US$2,4 billion in 2023.
Average capital adequacy ratio for the sector at 37,34% remained above the regulatory minimum of 12%.
All 18 banking institutions reported core capital levels in compliance with minimum capital requirements.
Asset quality remained satisfactory with an NPL ratio of 2,09%, which is well within the internationally accepted 5% threshold.
e improvement in NPL ratio from 3,62% as at June 2023 reflects sound credit management practices and internal controls within the banking sector.
Aggregate core capital increased to ZW$6,31 trillion in December 2023 from ZW$5,05 trillion in December 2022 due to organic growth.
Increased dollarisation levels and prohibitive ZWL interest rates skewed the market towards foreign currency-denominated loans, accounting for 84,67% of sector’s loan book, whilst 72,68% of lending was to the productive sector.
Non-interest income accounted for 84,27% of sector’s total income as at December 2033, but our observation is that 47,56% was in the form of revaluation gains, which are noncash.
Monetary policy framework
During the first quarter of 2024, the ZWL depreciated by 74% against the greenback on the interbank market, whereas the parallel market rate depreciated by 70%.
On this backdrop, the MPS’ main focus is on immediate measures necessary to boost demand for local currency, with the aim to re-anchor price and exchange rate stability and remonetise local currency as a reliable medium of exchange and store of value.
e policy is anchored on the following five policy measures.
New structured currency
e MPS is accompanied by SI 60 of 2024, introducing Zimbabwe Gold (ZIG), which is anchored by a composite of foreign currency and precious metals (mainly gold) held as reserves by the central bank. 1 ZIG is equivalent to 1mg of gold.
Banks are to convert all Zimbabwe dollar balances into ZIG at a swap rate determined by the closing interbank rate as at April 5 and London OM Fix price of gold as at April 4 2024. ZIG will co-circulate with other foreign currencies in the economy.
ZIG on forex balances
e RBZ can only issue domestic notes and coins backed by the basket mix of hard currency (currently US$100 million cash) and foreign-currency-denominated assets (gold worth US$185 million at present).
e total ZWL component of reserve money is ZW$2,6 trillion, estimated by the RBZ to be equivalent to US$90 million. erefore, the reserve holdings currently with the bank represent roughly three times cover for the local currency being issued.
Money supply management
is will entail containment of reserve money growth within limits of growth in gold and foreign currency reserves as well as discontinuation of quasi-fiscal activities and alignment of interest rates.
Bank policy rates have been reviewed downwards to 20% per annum from 130% per annum to reflect the new currency dynamics.
Exchange rate system
e RBZ has discontinued the auction system and replaced it with an interbank foreign exchange market under a willingbuyer-willing-seller trading arrangement.
e central bank will provide trading liquidity to the market using the 25% export surrender proceeds to support the foreign exchange management system to guarantee successful restoration of currency and exchange rate stability.
Market demands
Measures to boost demand for ZIG in the market will include a mandatory requirement for companies to settle at least 50% of their tax obligations on quarterly payments dates (QPDS) in ZIG.
Our thoughts
e economy has been moving towards full dollarisation, with over 80% of transactions conducted in US dollars as reduced confidence in the ZWL dwindled its market share.
Businesses are predominantly funding themselves in foreign currency, evidenced by the high proportion of foreign-currencydenominated loans in the banking sector.
In our view, these new measures reflect efforts to preserve the current status quo in terms of the multi-currency regime and are unlikely to interfere with functioning of other currencies as they affect roughly 20% of money supply.
e lack of further interference with foreign currency retention ratios for exporters is critical given the vulnerabilities posed by the ongoing drought and falling commodity prices.
e requirement for 50% of QPD payments to be in ZIG creates steady demand for ZIG, which should theoretically strengthen it.
We, therefore, expect a relatively stable USD:ZIG rate for as long as ZIG remains anchored.
e economy will likely remain pseudo-dollarised in the short-to-medium term, which is vital for stability, with the extent of migration to ZIG based on confidence.
It is likely, however, that some form of parallel market will emerge as a significant portion of the population remains unbanked and it is yet to be seen what level the parallel rate will settle at.
e RBZ did note recovery of foreign currency inflows during the first two months of 2024, suggesting healthy growth of reserves.
Whilst an anchored currency theoretically restricts money supply growth thereby arresting inflation, key downside risks remain discipline in maintaining tight money supply and vulnerabilities to fluctuations in gold prices and supply.
In addition, the currency is inflexible, which may affect the ability to finance the 25% surrender portions or large infrastructure projects.
Entities carrying ZWL obligations will, however lose the hyperinflationary reprieve that erodes the real value of their obligations with this crystallisation of loan values, possibly exerting pressure on them. — Inter Horizon Securities