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Zimbabwe: RBZ Tightens Monetary Policy


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Financial Gazette (Harare)

27 March 2008
Posted to the web 27 March 2008

Witness Chinyama
Harare

THE Reserve Bank governor on Tuesday announced measures to stop the massive accumulation of idle funds on the money market and improve the buying power of economic agents that had significantly been eroded by inflation.

In a statement entitled: Governor's Memorandum to Financial Institutions: New Monetary Policy Measures and dated 25 March 2008, the governor hiked accommodation rates, increased the tenor of the non-negotiable certificate of deposit and adjusted upwards the Statutory Reserve Rations.

Overnight accommodation rates were hiked from between 1200-1650% for secured and unsecured borrowing, respectively that had last been adjusted on February 1, 2008 to between 4000-4500%, respectively. This was done in an attempt to discourage speculative borrowing and inflationary credit expansion.

This implies an effective devaluation on the retained 32.5% portion of exporters' proceeds to Z$1.380 million against the US dollar, achieved through the enhanced overnight accommodation window from the previous Z$525000. The governor advised financial institutions that he would continue to adjust accommodation rates in line with liquidity and inflation developments.

The tenor on the zero percent, non-negotiable certificate of deposit (NNCD) that had been reduced from 270 days to only seven days on 31 January 2007 was increased to three months. This is because the banks had been reluctant to commit the excess liquidity that had accumulated on their balance sheets into Treasury bills as they yield only 340% per annum against an annual inflation rate of more than 100580%.

The Central Bank had observed this situation over the past two months with trepidation as all these excess funds "...could have been channelled towards funding of productive activity in the economy" (Memorandum, p2).

The Statutory Reserve Ratio was increased back to a maximum of 50% for commercial and merchant banks' demand and call deposits. The Central Bank had reduced the ratios on the 1st February 2008 to a maximum 40% in a bid to alleviate the liquidity crunch that had hit banks during the month of January 2008.

These measures are in addition to the increase in the maximum cash and cheque withdrawal limits announced at the end of last week.

The maximum amount of cash an individual or a company can withdraw per day was increased from the current Z$500 million to Z$5 billion while the cheque limit was increase to Z$50 billion from Z$5 billion. These measures are with effect from April 4, 2008.

Using the Old Mutual Implied Rate (OMIR) for the 25 March 2008 (US$43,855,402.07) as a proxy for the market value of the Zimbabwe dollar exchange rate against the US dollar, the increase in the daily cash withdrawal limits from Z$500 million to Z$5 billion increased the US dollar value of withdrawals from US$11.4 to US$114.

Inasmuch as the governor will continue to adjust accommodation rates in line with inflation developments, the same should be done with respect to cash withdrawal limits.

These measures, if they could be accompanied by a stoppage in the current high fiscal and quasi-fiscal expenditures, could result in a serious liquidity crunch which should drive investment rates to levels that approximate overnight accommodation rates of around 4000%. We expect banks to hike their minimum lending rates to similar levels.

The policy measures are however, deafeningly quiet on the interest rate that will be charged on the biggest borrower --Government.

This implies that the Treasury bill rate will continue at 340% per annum thereby encouraging it to continue borrowing with obvious economic consequences. Banks will again be forced to take this unattractive debt instrument for them to avoid the dreaded NNCD.

Equities investors that had already started crystallising their profits before the Easter holidays and ahead of the on-coming harmonised elections are expected to expedite their profit-taking behaviour.

A possible panic selling would, however, result in significant loses due to the resultant plunge in share prices. For those investors that have already been caught unawares by the monetary policy measures their best bet is to cautiously move out of speculative counters and maintain blue chip and currency counters like Old Mutual.

Meanwhile, reflecting the profit-taking behaviour that has been taking place on the equities market during the week to yesterday, the Industrial Index went down by 19.52% to close at 10,754,948,055.21 points while the Mining Index was down by 14.20% at 6,624,814,358.69 points.

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Sixty-four counters closed in negative territory compared to six that traded in positive territory. Major movers were led by the industrial counter, Radar that jumped by 40% to close at Z$7 million, followed by MedTech, that was up by 17% at Z$70000.

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Author: Homesick

I am a displaced African. Though I was born in America I would like to contribute to the economic growth of Zimbabwe, and other sub-Saharan countries.

I receive a small government stipend and would like to begin making monthly investments of $25 - $50 USD.

Could you please point me in the right direction? I am not certain whom I must speak with.

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