eBusiness Weekly
Misheck Ugaro
In their meeting of 22 May 2020, the Monetary Policy Committee (MPC) adopted resolutions supportive of the economic turnaround for the country.
The major highlight is the release of more liquidity onto the market through a further 200 basis points cut of the statutory reserve ratio from 4.5 percent effective 8 June 2020.
This follows hard on the heels of the recent 500 basis points reduction announced on top of the government stimulus package of Z$18 billion. As part of efforts to assist in the recovery and growth of the productive sectors of the economy and to help with post Covid-19 recovery, it was resolved that there was need to release more financial resources for the productive sectors through banks. The anticipation is that economic agents will access increased credit for utilization in productive purposes.
This comes against the backdrop of increased government borrowings that have historically surpassed private sector credit over the last five years beginning in 2016.
Government borrowings have crowded out private sector lending and that has contributed to less growth in production as well as macroeconomic instability epitomized by money supply growth leading to run-away inflation and a heavily depreciating local currency.
The release of more liquidity onto the market should not be inflationary if supported by further measures and the committee notably made reference to the need for authorities to expedite the implementation of the electronic foreign exchange trading system for compulsory use by bureaux de change.
This is amid serious concerns over the continued deterioration in the exchange rates that were widely being used by the private sector in their pricing models.
The parallel market exchange rate has depreciated to ZW$60: US$1 in recent weeks against the fixed interbank rate of ZW$25: US$1 and has created expectation based pressures fuelling inflation. The April figure stood at 765 percent rising from 676 percent in March.
The committee took note of speculative tendencies occurring on electronic banking platforms and it welcomed action taken by the Bank to curb such retrogressive activities.
It is also notable that in the current week the parallel exchange rate has stabilised around the $58:US$1 following those measures taken by the authorities including an enhanced monitoring of electronic transactions, namely on mobile money and ZIPIT platforms.
Industry and economists have long called for the removal of the fixed exchange rate policy and it is laudable that the committee also resolved for a formal market-based system of foreign exchange trading to be put in place.
It urged the Bank to strictly monitor foreign currency trades in real time.
This can be interpreted to mean a reintroduction of the Reuters system that was temporarily put on halt after having been introduced just before the onset of the COVID 19 pandemic.
The committee urged more active application of the Open Market Operations (OMO) Bills to deal with any identified excess liquidity balances in the market that might act as a source of speculative pressure against the exchange rate.
It also resolved to reinstate, with effect from July 1, 2020, the 30-day limit of liquidating surplus foreign exchange receipts from exports in order to ensure that more foreign exchange was released onto the market.
This will only work well once the bank removes the pegged exchange rate policy and implements the open trade system, or at best, as called for by industry, a crawling peg system.
◆ Misheck Ugaro can be contacted on (263) 777052004/712808140. Email [email protected], Linkedin: https://www.linkedin.com/in/misheckugaro , Twitter: @twitcagan.com
Misheck is a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society.
