By Tapiwanashe W Mangwiro.
HARARE – The newly commissioned Monetary Policy Committee in Zimbabwe met last week for the fourth time to make deliberations on the next step to take on the monetary front. They resolved to keep the overnight lending rate constant and increase the minimum capital requirements for banks.
The central bank has played with the lending rate a lot in the last six months with it going to 70% at one point. It did not take long after the MPC was instated when they reduced it to 35%, which is the highest in the region and one of the highest in the world.
Rate hike was as a result of curbing speculative borrowing but in November the MPC said the inflation outlook was pointing to a downward flow despite sporadic spikes during the year.
With the high rate, negative returns were experienced on bank loans even though we are in an inflationary period. The overnight rate and monetary targeting was used to stop the spiralling exchange rate as they cut borrowing and reduce free funds to borrow. Money borrowed was allegedly used in parallel market currency activities.
However the country is in a dilemma as most of the countries in the region are cutting down interest rate in order to stimulate growth, Zimbabwe is keeping them high. The country has to strike a balance between growth and inflation by reducing the chances of demand pull inflation.
Due to rising inflation which has depleted purchasing power of incomes, imports have reduced drastically but inflows of foreign exchange have increased to leave Zimbabwe with a technical surplus on balance of payments in 2019. In order to strengthen investor sentiment and the domestic currency the Reserve Bank of Zimbabwe needs to build up significant gold and foreign currency reserves.
In MPC deliberations released by Governor John Mangudya, held on January 17, the committee noted that there had been an increase in foreign exchange flows and that efficiency on the interbank market had improved.
The MPC agreed that the bank should set aside appropriate foreign exchange resources to intervene and stabilize the market, as may be required once the enhanced interbank market become fully operational in the near future after a total of US$1.5 billion has been traded on the interbank market as at December 31, 2019.
The MPC also resolved to strengthen the operations of bureaux de change by further liberalising their trading activities under a framework to be supervised by the Bank.
In 2019 the RBZ imported additional bank notes and coins to the tune of ZW$400 million. An amount of ZW$150 million was disbursed in the last quarter of 2019 to give a total of ZW$1.1 billion of notes and coins in circulation in the country as at 31st December 2019. This ZW$1.1 billion of notes and coins in circulation, represents 3.2% of total banking sector deposits of ZW$34.5 billion as at 31 December 2019.
As per normal banking practice, these funds were sold to local banks for distribution to clients in exchange for RTGS balances, so as to neutralize any expansion of money supply and therefore, inflation.
The MPC agreed that it should maintain its plan of getting the proportion of bank notes and coins in circulation up to 10% of deposits and that the Bank should consider the introduction of notes in larger denominations in line with inflation trends.
The MPCs deliberations do come with positive views although the country is in a dark place. The country needs to manage its finances in a better way as the issue is not about receipts but how we use the funds that we have earned. Government has misused funds with the command agriculture and government perks through big delegations during travels.
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