• Broad money supply grew 19% in September from ZW$1,608 billion in August
  • FCA deposits marginally increased to 62.5% of broad money supply

Zimbabwe’s broad money supply (M3) stood at ZW$1,917 billion for the month of September 2022, up 19 percent from the previous month and over 420 percent year on year. Foreign Currency Accounts (FCA) and local currency deposits constituted 62.5 percent and 37.4 percent, respectively, while currency in circulation accounted for less than a percent – which is below international thresholds of between 10 to 15 percent. The share of FCA deposits in broad money supply has increased significantly since the beginning of the year from accounting for just 42 percent to accounting for more than half of total deposits. The increase in money supply was a result of an increase in FCA deposits which surged by 20.7 percent over the period under review with local currency deposits increasing by 17%. However, the depreciation of the local currency against the greenback partly contributed to the increase in FCA deposits. Of importance, FCA deposit liabilities stood at ZW$1,196 billion in September which translates to circa US$1.9 billion, using the September exchange rate of ZW$621, against total FCA assets of US$1.1 billion – a mismatch of close to US$800 million.

In June this year, the central bank increased the bank policy rate from 80 percent to 200 percent and the medium term accommodation rate to 100 percent from 50 percent in line with the policy measures announced in May 2022. This was largely to discourage speculative borrowing and commercial banks from creating money thus putting a tight leash on money supply and tame inflationary pressures in the economy. Although the 200 percent bank policy interest rate is still below inflation implying negative real interest rates, the tight monetary policy stance has seen broad money supply increasing at a decreasing rate from a 33 percent increase in August to a 19 percent increase in September, which is consistent with policy expectations. In addition, time deposits have significantly increased by close to 100 percent from ZW$81 billion in June 2022 to ZW$157 billion as of September 2022 signaling a gradually growing appetite for savings in the local currency largely on the backdrop of the revised minimum rates on time deposits from 25 percent to 80 percent.

The reserve money policy targeting by the RBZ has seen statutory reserves accounting for 92% of reserve money as of October 28th with excess reserves (banks’ RTGS liquidity) accounting for just 0.1 percent owing to the tight monetary policy stance by the central bank. The RBZ went on further and introduced FCA required reserve requirements, which became effective on September 1st 2022, which saw a once off increase in reserve money from ZW$37.4 billion in August to ZW$87 billion in September. Government’s deposits at the RBZ have increased by over 140 percent to ZW$159 billion as of October 28th 2022 from ZW$66 billion in June as treasury has stepped up efforts to control its expenditures through adopting a value for money approach. This increase in government deposits has significantly contributed to the current liquidity challenges and slowdown in inflation as it represents a temporary reduction in money supply.

Although painful in the short term, it is imperative for the central bank to maintain the current 200% interest rate, or an even higher rate, in order to control inflation expectations and bank lending until month on month inflation averages at most 1 percent or 13 percent annualized. Furthermore, the RBZ should revise interest rates applicable to FCA loans as these bank loans can be used to circumvent monetary policy stance on the local currency. In the extreme, in order to avoid the creation of electronic or fictitious USD balances it is important for RBZ to maintain 100 percent reserve banking for USD balances as this could result in a significant source of increase in money supply.