Calls for exchange rate reforms, liquidity adjustments ahead of 2025 MPS

31 Jan, 2025 - 00:01 0 Views
Calls for exchange rate  reforms, liquidity adjustments ahead of 2025 MPS Since the implementation of a host of measures by Treasury, the premium on parallel exchange rate market declined substantially, while the official exchange rate has been stabilised

Tapiwanashe Mangwiro

AS Zimbabwe approaches the release of its 2025 Monetary Policy Statement (MPS) in February, industry stakeholders have put forward recommendations aimed at refining the country’s monetary framework.

The Confederation of Zimbabwe Industries (CZI) has submitted proposals advocating for a managed float exchange rate system, staggered daily foreign exchange allocations and a reduction in USD statutory reserves to enhance formal sector liquidity.

However, these recommendations remain proposals and have not been officially adopted by the Reserve Bank of Zimbabwe (RBZ).

CZI has been vocal in its recommendations to the Government regarding the upcoming MPS, urging the RBZ to fine-tune its foreign exchange management system.

“Maintaining the tight liquidity conditions which are bearing fruit, including interest rates, is critical for ensuring stability in the economy,” said a source close to the discussions.

The organisation also proposed shifting from weekly forex allocations to staggered daily distributions, arguing that this would prevent gaps in the system that could be exploited by the parallel market.

The industry body further recommended that Treasury Bills (TBs) issued to clear the foreign currency auction backlog be accepted as security for the Targeted Finance Facility (TFF). According to the source: “This move would not only clear the backlog but also improve confidence in the forex auction system, making it more predictable for businesses.” A major point of contention remains the exchange rate regime. CZI has proposed that the Government formally adopt a managed float exchange rate system as a refinement of the current framework.

The source explained that: “A managed float would provide a balance between stability and flexibility, allowing market forces to play a role while ensuring that extreme volatility is curbed.”

Despite acknowledging that the RBZ has made significant progress in stabilising the exchange rate and narrowing the parallel market premium, CZI believes more work is needed to build confidence in the ZiG currency. “The parallel market premium reflects a ZiG confidence deficit that must be urgently addressed through market-driven mechanisms such as instant convertibility,” the source noted.

Responding to industry concerns, RBZ Governor Dr John Mushayavanhu, emphasised that monetary policy must strike a balance between inflation control and economic growth. “By its nature, monetary policy is generally an aggregate demand management tool aimed at influencing interest rates and monetary aggregates to affect inflation, employment and output dynamics in the economy,” Dr Mushayavanhu said.

He also stressed that the central bank’s decisions are guided by key economic indicators, including inflation expectations, exchange rate trends, and supply-side shocks.

“The trade-off between stimulating economic growth and maintaining macroeconomic stability occurs when there is a co-existence of high inflation pressures and weak economic growth,” he explained.

“To mitigate the impact of monetary tightening, central banks across the world tend to use tailor-made and targeted approaches to stimulate production through what are called Term Financing”.

Regarding the upcoming MPS, Dr Mushayavanhu confirmed that the statement would be released in early February after the central bank had analysed economic data and consulted stakeholders.

“The public may therefore expect the Reserve Bank to release the Monetary Policy Statement in early February after the Bank has been able to analyse the relevant data up to December 2024,” he said.

The banking sector has also weighed in on the upcoming policy statement. The Bankers Association of Zimbabwe (BAZ), representing the financial sector, expects the RBZ to maintain its conservative monetary stance.

“Historical trends indicate that the Reserve Bank of Zimbabwe has consistently considered stability as their number one priority through a tight monetary policy framework,” said BAZ Chief Executive Fanwell Mutogo.

Mutogo highlighted that previous RBZ policies had prioritised financial stability through interest rate adjustments and liquidity management.

“The RBZ’s commitment to a conservative monetary policy has been evident in its previous measures, which have aimed at stabilising both price levels and the financial system,” he said.

BAZ has also called for policies that enhance financial inclusion, particularly for rural and underserved communities.

“Local banks have been collaborating with mobile network operators in recent years to enhance financial inclusion. The growth of mobile banking and financial technology solutions has enabled a larger portion of the population to access banking services,” Mutogo noted.

As the RBZ finalises its monetary policy stance, the central bank has not yet signalled whether any of the recommendations from CZI or the banking sector will be incorporated.

While stakeholders continue to lobby for adjustments, the central bank has remained focused on maintaining price stability and financial system soundness.

With businesses, financial institutions, and the general public awaiting the MPS, the key question remains whether the RBZ will introduce policy shifts or continue with its existing approach. For now, proposals such as the managed float exchange rate system and changes to forex allocations remain industry suggestions rather than confirmed policy changes.

As the country navigates economic recovery and inflationary pressures, all eyes will be on the central bank’s next move in early February.

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