eBusiness Weekly
Business Writer
Significant local currency shortages on the market forced individuals and companies to run down their FCA deposits to pay for imports and to meet other domestic obligations resulting in a decline in money supply, the Reserve Bank of Zimbabwe has said in its latest Monthly Economic Review for October 2022.
Foreign currency deposits in the banking sector declined by $64,90 billion (5,43 percent) from $1,19 trillion in September 2022 to $1,13 trillion.
Most economic agencies in the country are now transacting and borrowing in US dollars adding to an already damaging liquidity crunch caused by a tight monetary policy regime implemented by the Reserve Bank of Zimbabwe.
Faced with spiking inflation, which raced to 285 percent in August 2022, and a currency depreciation that threatened to reach 1,000 per US$1, the central bank introduced a raft of stabilisation measures.
Part of the measures included increasing the bank policy rate from the current 80 percent to 200 percent per annum as a way of reducing the money supply in the economy, while the Medium Term Accommodation interest rate increased from 50 percent to 100 percent per annum.
Individuals and companies found these interest rates too high for borrowing and to access the local currency have turned to liquidate US dollar positions resulting in a decline in broad money supply.
Broad money (M3) stock amounted to $1,88 trillion in October 2022, compared to $1,91 trillion recorded in September 2022.
“The decline could be attributed to the running down of FCA deposits by individuals and companies, to pay for imports and to meet other domestic obligations, amid significant local currency shortages on the market,” said the RBZ.
This is the first time the month-on-month money supply balance has declined since January 2022. The decrease in money supply was attributable to a fall in foreign currency deposits then as companies utilized their balances to meet foreign payments obligations. Economic analyst Kudakwashe Mugova said for firms using their USD deposits amid significant local currency shortages reflect increased dollarisation with the local currency “now playing a secondary role in the functions of money.”
“It also puts pressure on the FCA balances as forex (is used for local trades) and imports. The lending in USD will now need to be closely followed to make sure we don’t have a huge proportion of unfunded USD,” Mugova said.
The RBZ, however, said for the month of October the decline in FCA deposits was partially offset by an increase of $28,57 billion (3,96 percent) in the local currency component of broad money.
The money stock as at October 2022 was composed of foreign currency deposits, 60,15 percent; local currency deposits, 39,63 percent; and currency in circulation, 0,22 percent.
On an annual basis, broad money registered an increase of 350,43 percent, largely driven by the exchange rate revaluation on the foreign currency component of deposits, over the year. Of the 350,43 percent annual increase in broad money, foreign currency deposits contributed 210,78 percentage points while local currency deposits contributed 139,65 percentage points
The overall money supply includes inflows of foreign exchange from export proceeds and remittances, which amounted to US$8,84 billion over the ten months to October 2022.
Part of the foreign currency was converted into local currency at the official exchange rate, resulting in liquidity injections into the market.
Over the period, the official exchange rate moved from $97,14 per US$1 in October 2021 to $632,77 per US$1 in October 2022, resulting in growth of the Zimbabwe dollar equivalent of FCA deposits.
The local currency component of broad money also grew by 214,59 percent over the same period, largely due to credit creation by banks.
