The mid-term monetary policy review, released last week, presents a cautiously optimistic picture of Zimbabwe’s economic fundamentals. The Reserve Bank of Zimbabwe (RBZ) has maintained a stable monetary policy, particularly focusing on two critical factors: the balance of payments and money supply, which are key to maintaining a tight control over the local currency.
The review suggests that these fundamentals are now at levels conducive to moving the country towards a monocurrency domestic economy. The alignment of money supply with economic growth, coupled with the exchange rate, has been central to this effort. The report highlights that a real increase in money supply can only happen at the same rate as economic growth. Any deviation risks reigniting the hyperinflation that has plagued Zimbabwe over the last two and a half decades.
The RBZ’s policy hinges on maintaining both fiscal discipline and a sound monetary policy. Since the advent of the Second Republic, fiscal policy has been tight, with the government operating largely within its means, covering most of its running costs through tax revenues. Borrowing has been restricted to capital investment, allowing the economy to grow sustainably without undue reliance on debt.
The report by RBZ Governor Dr. John Mushayavanhu details the measures being implemented to control liquidity and money supply. The rise in broad money supply is largely attributed to one-off increases as banks resume local currency lending. Importantly, the bulk of lending is directed towards production rather than consumption, maintaining a conservative banking ratio of just over 50% of deposits.
Zimbabwe’s positive current account balance has been maintained, despite challenges like a severe drought which increased food imports. Even though this surplus may narrow slightly this year, the balance remains positive, helping to support the new currency, the ZiG, which has been fully backed by the RBZ. The backing of the ZiG has strengthened, growing from three-fold in April to four-fold by July 2024.
The RBZ is now focused on building reserves to meet global best practices, such as ensuring adequate import cover. With positive balances in place and a tightly controlled money supply, Zimbabwe is positioned for greater economic stability. The review indicates that if the country moves towards a monocurrency system, much of the foreign currency in circulation would be converted into the local currency. Net exporters and recipients of diaspora remittances could still manage their foreign currency needs, but the bulk of their money would flow into the banking system, ensuring enough liquidity to cover import needs.
A significant challenge remains in the multicurrency system. The practice of stockpiling foreign currency, coupled with distorted black market rates, has created inefficiencies in the economy. Although the black market has been substantially reduced, lingering issues around pricing persist, contributing to unnecessary inflationary pressures.
Some retailers have even considered turning to imports to replace overpriced local products, a move that could further strain the balance of payments and harm domestic industries. Despite these challenges, the call for a monocurrency domestic economy is growing louder. Such a transition could bring much-needed stability, provided that tight controls over money supply and reserves remain in place.
There are whispers of support for securing short-term assistance from the International Monetary Fund (IMF) to smooth the transition. However, even without external assistance, Zimbabwe appears well-positioned to manage the shift to a monocurrency system by building up reserves to ensure adequate coverage of the ZiG.
While Zimbabweans have grown accustomed to a multicurrency economy, the review suggests that they would likely accept the shift to a single currency, provided the fundamentals—like strict money supply control and the suppression of the black market—remain intact. The alternative of a foreign currency monocurrency economy, though considered, could risk tight liquidity and make Zimbabwean products uncompetitive on the global stage.
In conclusion, the RBZ’s mid-term review paints a picture of a country on the verge of economic consolidation, with a monocurrency system offering the potential for greater stability and growth in the near future.
Source: Business Weekly