Currency stabilisation measures recently announced by Government are meant to lessen money creation in the economy that, among other factors, has led to high levels of inflation and currency depreciation.
Zimbabwe has been reeling under price and currency instability, with the latest round of instability sending the premium between the official and parallel market rate above 100 percent.
At the same time, the official exchange rate itself is not stable and the local currency has lost approximately 40 percent of its value this year alone.
The result has been price instability and tacit rejection of the local currency by most economic agencies.
Authorities have in the past blamed the instability to speculators, currency manipulators, economic saboteurs and everything in between.
With the accusations came a plethora of stabilisation measures, but stability has stubbornly remained elusive.
The latest round of currency stabilisation measures is yet another attempt to quell instability.
A key focus area, for the new measures, is to curb excessive money supply growth.
RBZ data for the month of March 2023 show that broad money (M3) stock amounted to $3,195 trillion in March 2023, compared to $2,928 trillion recorded in February 2023.
On an annual basis, broad money registered an increase of 442.41 percent, compared to 478.56 percent in February 2023.
The local currency component of broad money increased by a staggering 322.47 percent, according to the RBZ’s report for March 2023.
According to economist, Milton Friedman: inflation is always and everywhere a monetary phenomenon.
Friedman argued that inflation can be produced only by a more rapid increase in the quantity of money than in output.
This claim that inflation is a monetary phenomenon is based on the quantity theory of money, according to which prices, including the exchange rate, vary in proportion to the money supply.
Friedman’s statement has been backed by empirical evidence, also showing a positive relationship between inflation and growth in money supply above the real growth in GDP for a large number of countries.
Therefore, if money supply increases, there will be more money chasing the same goods, so prices will go up. In Zimbabwe’s case, excessive money supply is chasing the greenback, partly as a store of value.
According to sources familiar with announcement of the new measures, there is strong belief that closing the printing press at the central bank might be the answer to price and currency instability.
One of the seven measures announced by Treasury is with regards adoption of all external loans from the central bank.
“All external loans to the Government will now be transferred from the Reserve Bank of Zimbabwe to Treasury,” reads one of the measures announced by Finance and Economic Development Minister Mthuli Ncube on the 11th of May this year.
In his presentation to global lenders at the IMF/World Bank Spring Meetings in April this year, Minister Mthuli indicated that the RBZ has an external debt amounting to US$3,37 billion.
Part of this money was borrowed to finance the foreign currency auction system with industry being the major beneficiary at rates considered at a discount when compared to the widely used parallel market exchange rates.
To pay these debts, the apex bank has to buy foreign currency from exporters and before the latest measures, from domestic foreign currency sales.
This meant the central back required a significant chunk of local dollars to pay for the forex, money it does not have, according to reliable sources.
To further reduce the need to print, Minister Mthuli announced that the RBZ, with effect from 15 May 2023, will “exempt all proceeds from domestic sales in foreign currency from the 15 percent surrender requirement.”
The two measures, according to sources close to the developments are expected to lessen money supply growth in the economy.
The sources said the need to service its debt was forcing the central bank to print money used to acquire foreign currency from surrender requirements.
While exporters have been surrendering part of their foreign currency earnings to the central bank for years, the surrender portion from domestic forex sales meant a much larger purse of the local currency was needed.
This, according to experts, is a form of printing money and one of the major causes of the currency instability.
“That is the albatross which we need to deal with. Whatever, we do, we need to deal with that as well.
“The RBZ borrowed money from Afreximbank two years ago and some of that money was allotted at the foreign currency auction system. So what has been happening is that the RBZ has been borrowing US dollars from the international market and repaying by buying foreign currency from the market with unbudgeted Zimbabwe dollars.
“There has been a significant jump between the exchange rate at the time of borrowing and the current exchange rate, that means there is money creation and we have to stop that.
“Since the money was used to fund the auction, we printed money to support industry and not Government,” said the highly placed source.
Economics Professor, Gift Mugano, is on record saying the central bank is basically printing money when liquidating surrender portions from exporters and domestic forex sales.
Prof Mugano said export retentions compels RBZ to print ZWL in exchange for the then domestic forex deposits and the surrender portion from export receipts.
“RBZ doesn’t have a budget set aside for this. This drives up money supply,” said Prof Mugano.
Reacting to the latest measures through his Twitter handle, Prof Mugano said the new policy measure
“will reduce money supply and improve business viability since exchange rate losses coming on the back of exchange rate disparities will be eliminated”.
He, however, said; “failure to scrap 25 percent export retention to control money supply and improve competitiveness of exporters,” is a policy omission.
Walter Mandeya, an analyst with Trigrams Investment said other areas that need to be looked at is the central bank’s ability to pay for forex surrender portions from tobacco and cotton farmers.
“We hope this will reduce RBZ printing but they may continue to print for other things.”
Cotton and tobacco farmers surrender 15 percent of their foreign currency earnings to the central bank and sources say the central does not have the local component and resorts to printing.