• Reserve money quarterly growth target maintained at 22.5%
  • The Bank’s 500 basis points policy rate hike announced in Feb unchanged
  • Medium-term Bank Accommodation (MBA) further increased by ZW$2.5 billion
  • Banks’ lending on MBA facility proceeds capped at 10% above borrowing rate

Harare - The recently constituted Monetary Policy Committee (MPC) of the Reserve Bank of Zimbabwe (RBZ) has met for the first time in 2021 and made some key economic and financial decisions to buttress measures announced in the February 2021 Monetary Policy Statement and sustain the current macroeconomic stability.

The MPC resolved to maintain the current conservative monetary targeting framework, anchored on 22.5% reserve money quarterly targets. It also agreed to keep the Bank policy rate and the Medium-term Bank Accommodation (MBA) Facility rate at 40% and 30% respectively.

Further, the MPC has increased the amount of MBA Facility by an additional ZW$2.5 billion to cater for the winter wheat planting programme. It also put a cap on the interest rate at which banks can on-lend the proceeds from the MBA Facility at 10% above the borrowing rate to ensure recovery of the productive sectors.

“The MPC also resolved to put in place a term lending facility to assist funding needs of SMEs benchmarked on the experiences of other central banks,” said the RBZ press statement. Exchange bureaus were encouraged to support Micro, Small, and Medium Enterprises (MSMEs) which require forex for their productive requirements at levels below the minimum qualifying threshold of the SME foreign exchange auction system.

The maintenance of a conservative monetary policy stance amid the adverse effects of the Covid-19 pandemic as well as a 500 basis points hike of the Bank’s policy rate to 40% on overnight accommodation is a mere admission by authorities that the local currency is not yet fully stable. By hiking the policy rate, RBZ is increasing banks’ opportunity cost of borrowing huge amounts for speculative purposes. Speculative attacks -massive and sudden selling of a nation’s currency -lead to sudden depreciation.

Also, a conservative reserve money growth is key for exchange rate and price stability. For starters, reserve money is the base level for the money supply (currency in circulation plus banks’ deposits with the central bank). This is the most price sensitive component of the money supply since it is injected directly and at the discretion of the Bank. Typically, the growth in money supply (base money) should always move in tandem with the growth of activity in the real sector otherwise it would be inflationary.

Statistics show that from January to June 2020, when reserve money grew by 38%, the local currency plunged by 69.8% on the interbank (80% on the parallel market) and annual inflation rose by 173.4 percentage points. In the second half of the same year, when reserve money grew moderately by 15.8%, ZW$ gained about 9% on the parallel market and annual inflation fell by 488.97 percentage points.

After a disturbance in January 2021, prices reverted to a downward trend since February thanks to a sustainable reserve money growth trajectory. For instance, in March, weekly RM grew by an average of negative 1.9% and the official exchange rate fell by a nadir -0.07%. Resultantly, yearly inflation plunged by 81.04 points to 240.55% and monthly outturn came in at 2.26%, the lowest outturn since Jan 2020. This clearly shows how important a conservative monetary targeting framework is to price and exchange rate stability in Zimbabwe.

For the 2020/21 winter wheat farming season, the MBA Facility has helped the country to harvest over 200,000 tonnes of wheat compared to a measly 90,000 tonnes attained in the prior season. The move by the Bank’s MPC to provide additional funding as well as capping interest rate on proceeds from that Facility will reduce farmers’ cost of production, increase participation and output. Also, the country will be able to save scarce forex. In 2020 alone, about US$100 million was spent on wheat imports. Resuscitation of productive sectors is key for long-term economic growth.

All odds are in the government’s favor this year. Many economic analysts predicted that the imminent bumper harvest will help to further reduce inflation. Due to the previous two (2) severe consecutive droughts, food inflation has been the major driver of headline inflation since 2019. Also, global economic activity is gaining momentum thanks to the Covid-19 vaccine campaign underway. This will highly likely instill a rally in commodity prices, the major forex generator for Zimbabwe. Bear in mind that 40% of export proceeds are surrendered to the Bank which in turn sells it at the interbank (auction).

However, it remains to be seen how authorities will finance the pending transactions in the next quarter without derailing the current sustainable reserve money level, exchange rate, and price stability. For instance, the government aims to spend about ZW$65 billion purchasing maize for strategic reserve. In the 2021 national budget, only ZW$8 billion was set aside for the same.

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