Reserve money surges on civil service salaries

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. Reserve money grew by 5 percent in the week to 19 February

. This is after a 2.4 percent surge in the prior week

. Government targeting quarterly reserve money growth of 22.5 percent in 2021

Harare – Reserve money increased by $1 billion to $19.91 billion, a 5 percent jump for the week ending February 19, reflecting a rise in banking sector deposits at the Reserve Bank of Zimbabwe, as the Government paid its workers.

In the prior week, reserve money dropped by 2.4 percent which the RBZ attributed to the sale of foreign currency on the auction and the collection of revenue.

This stock of money pertains to funds banks are allowed to hold at any given moment, which are readily available for purposes of lending or availing to clients and borrowers without negatively affecting the economy.

The central bank has been keeping a hawk’s eye on liquidity, as it maintains a stranglehold on money rapid supply growth, which can upset the macro-economic stability brought about by the exchange rate stability.

A cocktail of measures, including suction system setting limits on mobile money transfers and outright banning of agents and payments from bulk mobile lines as well as the monetary targeting have stabilized the exchange rate.

Authorities have also committed to maintain monetary and fiscal discipline as a cardinal rule to ensure the local currency sustains the current stability as the market grows confident in using it for transacting.

Banks are subject to requirements on the amount of cash reserves they must hold, as mandated by the central bank in order to maintain equilibrium between the needs of the economy and what banks can provide.

According to the recent reserve update, the RBZ said the billion-dollar surge in high powered money mirrors the increase in commercial banks’ deposits at the RBZ and currency issued by $819 million and $225 million, respectively.

This followed a decline in Government’s liquidity at the RBZ of $5.12 billion which consequent “to payment of salaries, wages and other expenditures by Government.”

However, this increased liquidity in the market is said to have been countered by net Open Market Operations which saw the issuance of savings bonds amounting to $4.89 billion and consequently withdrew liquidity from the market.

Since the turn of November 2020, government spending has risen sharply and compared to the present, reserve money balances have almost doubled their September 2020 level despite subdued economic activity due to covid-19 induced lockdown.

Resultantly, monthly average prices changed course and began a northward trend in the last three months while annual inflation saw its first jump since July 2020 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.

The MPC’s monetary targeting framework reform from the quarterly target of 25 percent in 2020 to 22.5 percent in 2021 is, therefore, a positive and welcome one and The Bank says it is in line with the targeted inflation of 10 percent and economic growth of 7.4 percent by year-end.

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

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