Reserve money dives on forex sale, revenue collections

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Reserve money weekly movements. Source: Equity Axis Research
  • Reserve money as at 12 February 2021 was down 2.4% on comparative week
  • Banks liquidity at RBZ dipped by over ZW$500 million
  • RBZ now targeting 22.5% quarterly reserve money growth from 25% in 2020

Reserve money in the Zimbabwean economy was down by 2,4% in the week ended Feb. 12, 2021, to settle at ZW$18.9 billion from ZW$19.38 billion recorded in the prior week ending Feb. 5, 2021. For starters, reserve money also known as High Powered Money in reference to its high propensity to impact monetary stability is the base level of money supply largely consisting of currency in circulation and banks’ deposits at RBZ.

Reserve money for the week under review declined by ZW$472.89 million, largely reflecting a decrease of ZW$554.73 million in banks’ liquidity at the Bank (RTGS balances). However, partially offsetting this decline were increases of ZW$79.80 million and ZW$2.04 in required reserves and currency issued, respectively.

“The decline in reserve money was largely attributable to revenue collections by Government, coupled with net foreign exchange sales to the market by the RBZ. Consequently, Government deposits at the Central Bank increased by close to ZW$4 billion, which had the effect of withdrawing liquidity from the market.” the Bank said.

This decline in reserve money is a step in the right direction given the impact of increased market liquidity to exchange rate and price stability. Since the turn of November, government spending rose sharply and by January 2021, reserve money balances have almost doubled their September 2020 level despite subdued economic activity due to covid-19 induced lockdown. As such, average prices (monthly) changed course and begun a northward trend in the last 3 months while annual inflation saw a first jump in 6 months in January.

Equity Axis analysts are of the view that the main source of inflation in Zimbabwe post dollarization reform is excessive growth in money supply which causes an exchange rate overrun and via pass-through effects negatively affect prices.

In another positive development, the Bank in its latest monetary policy for 2021 has committed to continue with a conservative monetary targeting framework. It is aiming to reduce the quarterly reserve money growth target from 25% in 2020 to 22.5% per quarter in 2021. The Bank said this is complementary to the targeted inflation of 10% by December 2021 and economic growth of 7.4%.

“The current stability in inflation and exchange rate needs to be safeguarded, maintained and sustained. The reserve money target of 22.5% is consistent with the targeted end-of-year inflation of below 10% and the projected 7.4% economic growth rate of the economy,” said RBZ governor John Mangudya.

If the Bank commits itself to these set targets and they are buttressed by a fiscal smart treasury as well as the realisation of a bumper harvest together with a sharp recovery in commodity prices, inflation will continue to subside for the most part of the year.

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