Liquidity squeeze hits Zimbabwe

Zimbabwe’s central bank is in the market mopping up excess liquidity using savings bonds as a deliberate action to regulate the quantity of money in circulation in addition to dealing with an exacerbation of massive money supply overhang in the banking system.

Reserve Bank of Zimbabwe governor, John Mangudya said about ZWL$14bn has been mopped from the market.

Mangudya said the central bank was targeting to suck more stocks of money from the market this year to ensure that it does not cause inflation or bring volatility to the exchange rate.

“In line with its conservative monetary targeting framework, the RBZ escalated its open market operations from October 2020 by aggressively mopping up excess liquidity through the issuance of short-term OMO savings bonds at 5% per annum interest. As at 31 December 2020, the outstanding OMO savings bonds stood at ZWL$14.1bn, representing significant amounts of sterilised excess liquidity,” Mangudya said.

“The OMO savings bonds complemented the existing 7% savings bonds with tenors ranging from 1 year to 5 years and a 30-day rediscount window. The outstanding amount of the 7% savings bonds stood at ZWL$5.6bn as at 31December 2020.”

Sucking out liquidity, analysts said, is a tricky balancing act, because the decision is likely to cause severe liquidity situations.

This means the credit expansion ability for banks is now reduced because of the reduced quantity of money in circulation.

This might mean that banks might run short of Treasury positions before the savings bonds mature. They will only be liquid when the central bank settles the bonds.

There is a highly likelihood of a further spike in interest rates. The RBZ has already increased interest rates on its overnight window to 40% from 35% as part of strategies to mop- up liquidity from the market and to help fight inflation as well as to discourage speculative, rent-seeking tendencies in the economy.  The new interest rate regime is likely to force banks to pass the cost of borrowing to depositors by increasing their lending rates as well.

Also, the liquidity squeeze is likely to push down asset prices such as that of stocks on the Zimbabwe Stock Exchange as the amount of liquidity chasing those assets would be severely constrained.

The situation might force banks to turn to the RBZ to borrow for them to have the liquidity to deal with daily calls.

Mangudya said the reduction in the volume of excess liquidity will steadily allow it to steer short-term interest rates in the appropriate direction.

This will also allow the apex bank to influence the interest rate structure.

The bank, Mangudya said, was committed to fully implementing its monitoring targeting framework to regulate the amount of money supply in the economy and align it with the desired inflation and exchange rate levels.

Month on month inflation stood at 362% in December 2020. The RBZ is expecting month-on-month inflation to come down to 10% at the end of the year.

Source – Business Time