The Reserve Bank of Zimbabwe Monetary Policy Committee (MPC) held its third meeting on 29 November 2019. The Committee met and deliberated on a number of issues including the potential monetary implications of the 2020 National Budget and the liquidity situation in the economy.
One of the take-away points from the meeting was the country’s expansionary fiscal policy which is expected to pile inflationary pressure on the economy.
The Committee noted that the 2020 National Budget has a potential expansionary impact on money supply, which limits the scope for tightening of monetary policy as required under the Bank’s disinflation programme. Concerned with the expected money supply growth, the Committee directed the Bank to re-calibrate the reserve money targeting framework.
On this point we raise the red flag. As Zimbabwe struggles to access concessionary funding, government appears to be relying on Treasury Bills to finance its projects. The summer cropping season will largely be funded from government coffers as most banks will take a cautious approach in funding agriculture. The remarks by the MPC not only reflect on its autonomy but also give signals on whether or not government will in the short term defend the value of the local unit which this week was trading at 24:1 against the United States dollar on the parallel market.
The Committee also noted that monthly inflation for November 2019 is projected to decline further and therefore resolved to maintain the policy rate at the current level of 35%.
The central bank is set to overhaul the country’s inefficient interbank foreign exchange market, as authorities push for the harmonisation of the exchange rate regime.
The Reserve Bank of Zimbabwe (RBZ) has, for the first time since the inception of the interbank market in February this year, admitted that there was serious abuse of the system by the banks.
The interbank foreign exchange system effectively devalued the local currency which was initially pegged at par with the United States dollar but the model was ditched in February.
The foreign exchange policy, however, has failed to deal with the economic crisis. Zimbabwe is still gripped by serious shortage of foreign currency. Apparently, businesses have long been calling for the overhaul of the market claiming there was abuse in the system.
But, foreign currency has not been available forcing them to turn to the alternative market where they pay high premiums. In turn, they pass the cost to the long-suffering consumers.
While the measures seek to restore market confidence, we still believe that Zimbabwe has no fundamentals that justify a domestic currency.
The fundamentals include a minimum of foreign exchange reserves equivalent to one year of import cover, which we believe are currently less than one week’s import cover.
The other fundamentals are that Zimbabwe should have a balanced and sustainable government budget, high consumer and business confidence, a sustainable level of inflation, and a healthy job market. All these have not been met.