HARARE- The Reserve bank of Zimbabwe, which is responsible for formulation of monetary policy has failed to release scheduled periodic data as per norm, a development that may affect perception and confidence in the economy.
On a monthly basis the RBZ is scheduled to release an monthly economic review report, which gives summary and review of key economic aggregates such as inflation, money supply, national payment system, external trade performance and capital markets performance.
Although other individual performance aggregates are computed using data from some agencies such as the ZSE and the ZIMSTAT, exclusive data generated by the RBZ, such as money supply has not been forthcoming since January. According to the RBZ website, January report is the most latest.
The Bank is thus running on a 5 months backlog, which makes it difficult for players in markets such as forex exchange, stock market and money market to make more informed decisions.
According to the January report, money supply was at $9.8 billion which was 1.53% month on month decline although it grew 5.56 percentage points year on year. According to the RBZ, the growth reflected an increase in broad money stock from $7.5 billion to $9.86 billion as at January 2019.
The behaviour of money supply in Zimbabwe is closely watched by market players as it reflects government’s own borrowing activities on the open market. The government of Zimbabwe has become the biggest borrower on local markets in recent years and in 2018 alone contracted new debt to the tune of more than $2.5 billion.
Although all governments are entitled to borrowing for purposes of stimulating growth, the rate of growth in money supply in Zimbabwe lagged economic growth by far. In 2018 the economy is estimated to have grown by about 3% to $22.5 billion while money supply rose by over 35% to $10 billion.
Much of the growth in money supply was for budgetary support committed towards recurrent expenditure which up until 2018, constituted over 85% of the total budget. It then meant that financial resources allocated for budgetary support were not channelled towards productive sectors and therefore could not proportionally drive economic gains upwards.
Instead the growth in money supply has led to rampant inflation as local forms of money either RTGS$ or bond notes gained dominance in local transactions due to their growing quantum against other currencies in the multi currency basket, particularly the USD. This has been true for years between 2016 and 2019.
Inflation according to the official statistics closed at 76% as at April and is set to go further up following price adjustments in recent weeks. Much of the impact on inflation lately has been due to the liberalisation of the exchange rate and the movement towards pricing of goods in RTGS$ equivalence and not USD.
To demonstrate the significance of money supply data and its impact on forex price discovery a look at some recent market developments is paramount. In February, following release of the 2019 monetary policy statement, the Governor responded to one of the questions saying that the resultant exchange rate would be contained within a certain range of not more than 4 times.
His argument stemmed from the deduction that money supply in the economy in terms of transferable deposits would not support an exchange rate of more than 4 times. He alluded to the fact that transferable deposits were circa RTGS$1.8 billion which if completely exchanged with USD in the banking sector at $300 million would give an exchange price of about 1:6. He further argued that this price would be unsustainable as it would result in USD chasing RTGS$ for purposes of local settlements thus pushing the RTGS$ price higher.
Although markets have evolved in a stunning manner with the exchange rate having closed Friday at a rate of 6 times, the logic from a fundamental perspective would have been accepted, although too many factors had been hold constant such as confidence in both currency and the issuing authority by both buyers and sellers.
Despite these developments, it remains that market players are keen to track money supply behaviour to help them form a basis for proper exchange rate determination, as it is the most single important variable carrying more weight, in that valuation.
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