The Reserve Bank of Zimbabwe (RBZ) yesterday forecast annual inflation to plummet to less than 10% this year, driven by a good agricultural season, fiscal and financial sector stability.
Zimbabwe has received goods rains this year, which are expected to fire up exports and foreign currency earnings.
In December 2020, Finance and Economic Development minister Mthuli Ncube projected annual inflation to drop to 136% at the end of 2021, after volatilities pushed the rate to 837% in July before declining to 348% by the end of last year.
"Coupled with increased food production due to a favourable agricultural season, inflationary pressures are expected to remain subdued in the short to medium term," RBZ governor John Mangudya said in his Monetary Policy Statement yesterday.
"As a result, the economy is expected to continue experiencing a gradual disinflation from the 362,6% annual inflation in December 2020 to below 10% by December 2021. This inflation path will be underpinned by a targeted month-on-month inflation rate of below 3%."
Basic commodity prices have skyrocketed since the lockdown was announced in January, shooting by over 20% in some key products, and driving up the annual inflation rate to 362% in January 2021.
Mangudya said: "The expected decline in annual inflation to single digit levels will allow banks to meaningfully remunerate depositors, while achieving positive interest rates in real terms.
"In this context, the bank calls upon banking institutions to aggressively promote savings deposits by encouraging their customers to subscribe to attractive medium to long-term instruments which not only preserve value, but also enable productive sectors to borrow on a long-term basis."
Analysts at Morgan&Co have forecast significant rises in black market exchange rates, which could hit US$1:ZW$200 by the end of the year, from the current range of around US$1:ZW$112.
The official system has been struggling to meet local demand by business and government.
The Zimbabwean dollar has also depreciated on the foreign currency auction system, where it is currently trading at US$1:ZW$83,37 from last year's US$1:ZW$81 rate.
Inter-Horizon Securities this week said while a good agricultural season may calm market jitters, heavy rains may affect yields in key export crops and undermine projected foreign currency inflows.
The RBZ stuck to the 7,4% gross domestic product growth announced in December.
"Notwithstanding Covid-19 related challenges, the bank remains optimistic that the expected economic growth of 7,4% in 2021 is achievable," Mangudya said.
"The bank also projects annual inflation to close the year at below 10%. The measured optimism is based on the expected significant growth of the agricultural output in 2021, as a result of the good rainy season, fiscal sustainability and the bank's focus on price and financial system stability."
The RBZ chief said he would focus on fighting inflation and price shocks.
He sees continued stability of the foreign currency auction system playing a huge factor on the economic front, as it makes provision of foreign currency to productive sectors easier.
While it has recently come under pressure from higher demand for foreign currency, many analysts agree that the foreign currency auction system led to a stable market-based exchange rate from June 2020.
It defused the parallel market rage as companies began accessing cheaper funding from the official system.
Almost US$800 million has flowed to exporters since the auction system came into force.
"Whilst more still needs to be done in this area, the evident stability of the exchange rate, following the introduction of the foreign exchange auction system on 23 June 2020, has minimised distortions in pricing by curtailing speculative pricing and parallel market exchange rate indexation of prices by businesses," Mangudya said.
"Consequently, the parallel exchange rate premium has reduced to a tolerable band of up to 20%, consistent with experiences in other countries.
"In addition, the establishment of an appropriate market-based exchange rate system has assisted in dampening pressures on inflation," he said.
"A significant proportion of the total amount allotted (from the forex auction) has been earmarked for strategic sectors for imports of essential goods, especially raw materials, equipment, pharmaceuticals, chemicals, fuel and electricity.
"To date, more than 70% of total foreign currency allotted has gone towards import of raw materials, machinery and equipment while other essential and strategic imports, including pharmaceuticals and chemicals, fuel and electricity have, taken around 11% of the total allotments," the central bank chief said.
He said the RBZ had implemented a conservative monetary targeting framework to contain money supply growth and reduce pressure on the exchange rate.
The bank achieved a conservative quarterly growth in reserve money of 18,6% in 2020, against a target of 25% per quarter previously.
At the end of December last year, reserve money was ZW$18,76 billion (US$225 million), compared to a year-end target of ZW$25,20 billion (US$3012,2 million), Mangudya said.
"It is evident that the bank's focus should be on monetary and financial system stability. The RBZ will be increasing the bank policy rate for overnight accommodation from the current 35% to 40% per annum and the medium-term lending rate for the productive sector lending from 25% to 30% per annum," he said.
"The decision on interest rates takes into account the current liquidity conditions in the market and the need to continue controlling speculative borrowing.
"Increasing statutory reserves from 2,5% to 5% for demand and/or call deposits and maintaining 2,5% for time deposits. The differentiation of statutory reserves by maturity is expected to incentivise banks to hold long-term liabilities or time deposits which will facilitate long-term lending in the medium-term."
On the balance of payments, Mangudya said preliminary estimates showed that the current account improved from a surplus of US$900 million in 2019, to a surplus of US$1,1 billion in 2020.
"The strong external sector position was spurred by merchandise exports which increased by 5,8% from US$4,7 billion in 2019 to US$4,9 billion in 2020," he said.
Mangudya said the total foreign currency receipts for 2020 amounted to US$6,3 billion, an increase from US$5,5 billion received in 2019.
The RBZ chief said international remittances amounted to US$1,7 billion in 2020, an increase of 43% from US$1,2 billion recorded during 2019. Diaspora remittances accounted for US$1 billion of the total, a 58% increase from US$635,7 in 2019.
He said the country experienced a 31% decline in gold deliveries from 27,66 tonnes in 2019 to 19,05 tonnes in 2020.