Zimbabwe: What to Expect From the Monetary Policy

analysis

The Reserve Bank of Zimbabwe (RBZ) governor John Mangudya (pictured) is expected to present the first monetary policy statement of 2021 within the next seven days, at a time when the coronavirus (Covid-19) pandemic has stifled various economic activities in the country. Hopes of returning to normalcy in the current year are fast fading away with local infection and mortality rates still high. This puts pressure on the government to find resources to procure vaccines and achieve some level of immunity which can allow economic recovery.

The last 45 days have also seen significant price increases for fast moving consumer goods and services due to upsurge in fuel prices, growth in money supply and increase in real production costs. As a result, month-on-month inflation rate for January 2021 was 5,43%, gaining from the December 2020 rate of 4,22%. Similarly annual inflation increased to 363%, from 349% as of December 2020.

Despite the government setting a target to reduce annual inflation to below 9% in 2021, the central bank's monetary policy has largely carried over from 2020 when reserve money grew by 103% to over ZW$18,76 billion in December 2020.

Revelations that the bank is printing over ZW$1 billion per week to buy gold points to the unsustainability of the central bank's quasi fiscal operations. The monetary policy also comes after the central bank transferred external debt of over US$1,4 billion borrowed from the Afreximbank over the last two years to import strategic commodities and stabilise the local currency.

The increase in foreign debt has exposed the central bank's quasi fiscal role in supporting expenditure contrary to the bank's core mandate in the economy and the sidelining of parliamentary oversight before contracting debt.

The impending monetary policy is not expected to implement any major policy changes given the fact that the bank recently reviewed its foreign exchange regulations and is trying to instill stability in the foreign exchange market.

Money supply

The central bank is largely expected to stick to the current money printing schedule which will possibly take reserve money to over ZW$32 billion by the end of the second quarter. Growth in reserve money will keep annual inflation above 250%, enough to support Treasury's ambitious tax revenue target of collecting ZW$390,8 billion in 2021 (Up from ZW$182,59 billion collected in 2020).

Tobacco farmers concerns

The tobacco selling season is expected to start in March with tobacco farmers pushing for a review of last year's framework where they retained only 50% in foreign currency for delivered tobacco while the remainder was paid in local currency using a fixed exchange rate of US$1:ZW$25, which prevailed back then.

The farmers are not happy with last year's payment modalities and have tabled an offer of a higher retention scheme to the central bank. The local currency has depreciated further with the rate now at US$1:ZW$83,37, albeit under a covert soft peg. Last year tobacco farmers delivered 180,8 million kilogrammes of the golden leaf and the country earned US$763 million from exporting the commodity mostly in raw or semi-processed form. This means that the bank has to balance the farmers' demands and its foreign debt repayment commitments considering the importance of tobacco production in the economy.

Foreign exchange regulations

The central bank recently scrapped the 60 day mandatory liquidation policy on foreign earnings and reduced the portion of retained export earnings to 60% (from 70%) for all exporters. The move has enraged various exporters with gold production expected to plummet further in 2021 from the 19 tonnes achieved in 2020.

Various producers across the divide from mining and manufacturing share the same concerns that the central bank is subsidising imports of finished goods at the expense of export growth. However, the bank is unlikely to make any changes to the export retention scheme in the impending monetary policy statement.

The auction market has of late faced delays with foreign currency buyers taking on average four to six weeks to get their allotted foreign currency from the auction market. Private sellers have virtually ignored calls to sell their foreign currency via formal banking channels due to the large spread between the formal rate and the parallel market rate.

Further, growth in money supply, opening of small businesses and the country's land borders (especially Beitbridge Border post) will add more pressure on the parallel market exchange rate which informs prices on the local market.

Interest rates

The apex bank may increase interest rates from the current 35% in order to reign in on speculative borrowing, money creation and manage inflation. The central bank increased interest rates from 15% to 35% in June 2020 and has maintained the rate at that level for the rest of the year despite inflation averaging 655% for the year. The current environment encourages speculative borrowing with lenders certain to make losses on issued loans due to anticipated depreciation in the local currency.

Mobile money limits

In October, the central bank reviewed mobile money transaction limits from ZW$5 000 per day to ZW$35 000 per week after an outcry from the transacting public and merchants. This means that at the moment, mobile money subscribers can exhaust their weekly transaction limit in one day. Therefore, the bank will likely maintain this policy with the prevailing cap of ZW$5 000 per transaction in sync with maximum tax collections from the Intermediated Money Transfer (IMT) Tax from Treasury.

The central bank is very much unlikely to ruffle feathers considering the benefits of sustained price and market stability enjoyed in the past six months. The need to gazette the Afreximbank debt or possible consultations with key producers such as tobacco farmers, miners and manufacturers could have delayed the monetary policy statement. Now that the taxpayer has picked the tab on US$1,4 billion debt, the monetary policy for 2021 can be pronounced.

Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe.

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