Money supply growth induces Zimbabwe dollar weakening

IN Tuesday’s Reserve Bank of Zimbabwe auction results, the Zimbabwean dollar (Zimdollar) fell marginally against the greenback by 0,16% to ZW$84,1197 from a close of ZW$83,9830 in the prior week. The rate of depreciation on the interbank continues to subside thanks to rising forex supply and falling base money levels.

Although the gap between the parallel rate and official rate continues to widen at more than 40%, it has been stable for the past four weeks and is showing signs of moderation. Notably, the Zimdollar has shed circa 3% of its value on the interbank since the year started, begging the question of whether this run will be maintained. Well, a possible increase in the money supply in the months to come will likely have the effect of further weakening the Zimdollar.

In the week ending March 12, Reserve Money declined by ZW$1,91 billion (US$22,7 million) to ZW$18,72 billion  (US$222,6 million) from ZW$20,55 billion (US$244,3 million) in the previous week. This was principally owing to a reduction in banks’ RTGS balances at the RBZ. Meanwhile, currency in circulation also declined by ZW$24,06 million (US$286 087).

Government deposits at the central bank increased by ZW$3,08 billion (US$36,6 million), as companies began preparing for the March 2021 quarterly tax payments. This has the effect of withdrawing liquidity from the market. Partially offsetting the decrease in reserve money was an increase of ZW$116,83 million (US$1,39 million) in banks’ required reserves.

Reserve money refers to currency in circulation plus commercial banks deposits with the central bank. It is typically called base or high-powered money, implying that it has a higher propensity to impact monetary stability compared to M2 and M3 (broad money).

The central bank is targeting to tame reserve money growth to under 22,5% per quarter in 2021 from 25% in 2020, in a bid to maintain a grip on the relative inflation and exchange rate stability being currently experienced in the country.

This is a positive development because excessive growth in money supply has been a major driver of inflation. The slash in the reserve money growth target is also in line with targeted end-of-year inflation of below 10% and economic growth of 7,4%. With the harvesting season at bay, Zimbabwe supposes an output of between 2,5 million and 2,8 million tonnes of maize and 360 000 tonnes of traditional grains, in what could prove to be the largest yield achieved since the land reform was inaugurated in 2000.

Along with the anticipated harvest, the government requires ZW$60 billion (US$713,4 million) to buy maize from farmers this marketing season. The RBZ Chief, Dr John Mangudya, last week assuaged fears that the Government accounts would not meet payments for maize deliveries to the Grain Marketing Board (GMB) despite holding ZW$13 billion (US$154,57 million) against requirements of circa ZW$60 billion arguing the requirements were spread over four months (with no need to borrow from the RBZ).

However, according to precedence, this will likely trigger money supply growth as this is a situation, which would compel monetary authorities to print more money, ultimately triggering inflationary pressures on the market.

Meanwhile, the central bank increased required reserve ratio (RRR) on all call deposits from 2,5% to 5%. Since statutory reserves are a component of base money, the increase in the RRR has an effect of increasing reserve money balances.

In my view, this RRR adjustment is a submission by authorities that the local currency is not yet fully stable. By increasing the ratio, it reduces the amount available to banks for discretionary lending.Furthermore, the Bank’s policy rate for overnight accommodation was increased by 500 basis points. The move penalises speculative borrowing.  In the meantime, the economy is expected to recover slightly in 2021, mainly supported by expectations of resumption in external demand as a result of progress in vaccinations, buoyant agriculture performance and the progressive easing of Covid-19 restrictions.

Equity Axis analysts expect this to support the local currency and maintain a solid run against the US dollar this year.

Mabunda is an analyst and TV anchor at Equity Axis, a leading financial research firm in Zimbabwe. — ebenm@equityaxis.