- Reserve money up by ZW$2 billion w.o.w
- Current levels are a record high
- RBZ says surge inspired by acquisition of forex for funding the IMB
In the week ending 8 January 2021 Zimbabwe’s reserve money balances up by 9,6% against the prior week, to close at ZW$20.76 billion. This is the highest level ever the aggregate has scaled up to.
Reserve money refers to currency in circulation plus commercial banks deposits with the central bank. It is typically called base or high-powered money, implying that it has a higher propensity to impact monetary stability compared to M2 and M3 (broad money).
In recent years Zimbabwe’s currency stability has emanated largely from an unhinged growth in reserve money as the Bank issued currency to help fund government’s unbudgeted for expenditure.
As a consequence, inflation has returned to hyperinflation territory, reaching a highest of 840% in August 2020, while the new currency almost risked suffering a similar fate to the Zimdollar of pre dollarization years. The local unit shed circa 75% in 2020 and an even worse off performance in 2019.
In 2020, Reserve Money grew by 115% which is equally a deadly territory, but however better off considering that half way into the year, the aggregate was 284% up year on year. RBZ and the MPC has been putting in measures to stem the growth levels to a sustainable path, measures which were buttressed in the second hand period of 2020.
According to the latest update issued by the Reserve Bank of Zimbabwe (RBZ), the ZW$2 billion increase in reserve money in the week under review was prompted by an increase in the liquidity balances of banks at the Reserve Bank, an increase in currency issued and required reserves.
“The rise in reserve money largely reflected an increase of ZW$1.69 billion in banks’ liquidity at the Reserve Bank (RTGS balances), coupled with increases of ZW$174.05 million and ZW$134.06 million in currency issued and required reserves, respectively,” the Bank stated.
The increase in banks RTGS liquidity is said to have been partly driven by a move by the RBZ to purchase foreign exchange from the market with the aim of funding the foreign currency auction.
The foreign currency auction on top of various enacted policies including the restriction of mobile money operations has been extremely pivotal in the stabilization of the runway USD to ZW$ exchange rate and the taming of inflation and therefore it is of paramount importance that it stays funded.
This need for continued USD liquidity in the auction has seen a new policy tweak by the Reserve Bank of Zimbabwe’s (RBZ) Monetary Policy Committee (MPC) which dictates that the Bank will now retain 40% of all export earnings as an Export Surrender Requirement up from the previous requirement of 30% in order to further increase the foreign currency on the auction market.
On top of the new retention requirement, the expected rise in commodity prices this year is expected to have a positive impact on the availability of foreign currency on the auction in 2021 and ultimately the strength of the Zimbabwean Dollar. Mineral commodities typically account for up to 80% of Zimbabwe’s total foreign currency earnings.
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