Since inception of the Reserve Bank of Zimbabwe Auction System in June 2020, a total of US$4.09 billion has been allotted, representing 85% of the total bids submitted, the central bank has disclosed.
In its Mid-Term Monetary Policy Review Statement just released, RBZ said the measures announced are, primarily aimed at ensuring that the country stays on course or continues to hold on to the right path of the progress that it has attained on the price and financial stability fronts.
The central bank added that similarly, the financial sector has remained safe and sound with adequately capitalised institutions that can underwrite lending to support the growth trajectory.
RBZ said the strong monetary and financial position has been corroborated by sustained fiscal stability where the Government continues to manage its fiscal position within internationally acceptable ranges of fiscal deficits of below 3%.
Read party of the statement below:
SECTION ONE: INTRODUCTION AND BACKGROUND 1.
This Mid-Term Monetary Policy Review Statement (the Statement) is issued at a time when the economy is on the right track toward sustained price and exchange rate stability.
The measures in this Statement are, therefore, primarily aimed at ensuring that the country stays on course or continues to hold on to the right path of the progress that it has attained on the price and financial stability fronts.
Precisely, the Statement, which is issued in terms of Section 46 of the Reserve Bank Act [Chapter 22:15], will evaluate the monetary policy stance and policies pursued by the Bank in the past six months ended 30 June 2023 and outline the monetary policy stance to be pursued by the Bank in the next six months.
2. The country experienced significant exchange rate depreciation between April and June 2023 driven by both demand and supply factors, which exerted significant pass-through to inflation. The demand factors mainly reflected elevated demand for foreign currency for store-of-value purposes.
The effect of the high demand for foreign currency on the economy was coupled with the sudden decline in the demand for local currency due to speculative behaviour, including exchange rate indexation at excessively undervalued or over-depreciated exchange rates.
In addition, supply factors emanating from a transitory decline in foreign currency receipts on account of declining export commodity prices such as the Platinum Group of Metals (PGMs).
The adverse supply trends have, however, since reversed. 3. The bold policy intervention measures instituted by the Government and Bank for tackling the transitory price and exchange rate volatility have gone a long way in arresting the instabilities and bringing the much-needed normalcy in the price and exchange rate dynamics and calmness in domestic markets.
This normalcy will be critical to anchor the robust economic growth projected at 5.3% in 2023, supported by a good performance by the agriculture and mining sectors, recovery in tourism and expected improvements in electricity generation in the second half of the year.
4. The country’s macroeconomic fundamentals have remained strong to support and sustain the current price and exchange rate stability as attested by the continued favourable balance of payments, low growth in money supply, and a safe and sound banking sector.
Precisely, the country’s balance of payments current account has been in a surplus position since 2019 and is projected to close the year 2023 with a surplus of US$274.5 million.
On the monetary front, money supply growth has been under control as evidenced by the slow growth in local currency lending since January 2023.
5. Similarly, the financial sector has remained safe and sound with adequately capitalised institutions that can underwrite lending to support the growth trajectory.
The strong monetary and financial position has been corroborated by sustained fiscal stability where the Government continues to manage its fiscal position within internationally acceptable ranges of fiscal deficits of below 3%.
6. The strong macroeconomic fundamentals obtaining in the economy suggest that the exchange rate instability witnessed between May and June 2023 was not a result of monetary factors but a reflection of adverse behavioural factors and insatiable demand for foreign currency by economic agents.
The measures instituted by the Bank, which include further liberalisation of the exchange rate, tighter monetary policy and the introduction of gold coins and gold-backed digital tokens are bearing fruit as evidenced by the current firming and relatively stable exchange rate dynamics.
7. The ongoing intervention in the foreign exchange market through the wholesale auction system is exerting a dual effect of mopping up excess liquidity and reestablishing the optimal mix of the dual currencies, thus sustaining the current exchange rate and price stability.
As a result of the adroit policy measures, the country witnessed a significant correction in the exchange rate which had overshot its equilibrium.
The correction in the exchange rate has led to a concomitant correction in prices. 8. As a result, the steep increase in month-on-month inflation from 15.7% in May to 74.5% in June 2023, significantly reversed in July 2023 to minus 15.3%. Similarly, the annual inflation which had risen from 86.5% in May 2023 to 175.8% in June 2023, fell to 101.3% in July 2023. 9.
The Bank remains confident that the continued sale of gold coins and gold-backed digital tokens will sustainably take away steam from the store-of-value demand for local currency during the short to medium term, with positive spinoffs on the substance of the obtaining price and exchange rate stability.
Furthermore, the Bank’s strategic resolve for continued monetary prudence will add further impetus to the positive prospects of the local currency over the medium term.
In addition, the ongoing monitoring and surveillance by the Financial Intelligence Unit (FIU) will effectively minimise incidences of exchange rate manipulation and abnormal pricing practices.
10. The rest of the Statement is organised as follows: Section two assesses the effectiveness of previous monetary policy measures; Section three highlights the recent economic developments; Section four provides financial sector developments, Section five covers Balance of Payments developments and outlook, Section six provides the new monetary policy stance for the next six months, Section seven outlines the economic and inflation outlook and lastly Section eight concludes the Statement.
8 SECTION TWO: ASSESSMENT OF PREVIOUS MONETARY POLICY 11. The Monetary Policy measures announced in February 2023 have gone a long way to foster stability in the economy as reflected by the sustained decline in annual inflation from 101.5% in January to 75.2% in April 2023.
The economy, however, saw a re-emergence of inflationary pressures in the economy during the second quarter of 2023, mainly driven by exchange rate depreciation.
The exchange rate depreciated on account of a temporal foreign currency shortages as commodity prices declined, while the demand for foreign currency for store-of-value purposes increased.
12. In view of the above, a combination of supply and demand management policy measures instituted by Government and the Bank, coupled with market discipline measures instituted by the FIU were critical to stabilise the market and foster confidence in the economy. Money Market Liquidity 13. The tight monetary policy stance adopted by the Bank was maintained throughout the first half of 2023.
The Bank continued to mop up excess liquidity from the market through the issuance of Non-Negotiable Certificates of Deposit (NNCDs). In this regard, the outstanding NNCDs as of 14 July 2023 amounted to ZW$163.5 billion. Lender of Last Resort Facility 14.
The month of June 2023 saw significant depreciation of the exchange rate which coincided with the second Quarterly Payment Date (QPD) for corporate taxes.
Significant liquidity was withdrawn from the market through the QPD and most banks saw their liquidity levels dwindling resulting in three banks approaching the Bank for support through the lender of last resort (LOLR) facility. The outstanding amount under the LOLR facility was ZW$32.5 billion as of 14 July 2023.
Bank Policy Rates 15. The Bank policy rate which had been pegged at 150% per annum since February 2023, was reviewed downwards by the Monetary Policy Committee (MPC) to 140% effective 1st April 2023, in line with the downward trend in annual inflation.
However, the re-emergence of exchange rate volatility witnessed from mid-April 2023, reversed the downward inflation trajectory thus compelling the MPC to review the Bank policy rate upwards, from 140% to the current level of 150% per annum.
16. The increase in the policy rate was moderate as the Bank noted that exchange rate depreciation and inflation pressures were not emanating from increased money supply due to borrowing for speculative purposes.
The exchange rate depreciation witnessed in May 2023 was de-linked from developments in the money-supply growth nexus.
10 Medium-Term Bank Accommodation Facility (MBA) 17. The MBA which was introduced in 2019 has immensely supported the productive sectors of the economy. The outstanding balance as of 14 July 2023 was ZW$36.5 billion.
The MBA rate has been adjusted in tandem with the benchmark Bank policy rate in response to inflation developments.
As such, the lending rate for MBA Facility for the productive sectors, including individuals and MSMEs is currently at 75% while the Bank policy rate is at 150% after the upward adjustments of interest rates on 6 June 2023 following the resurgence of inflation pressures in the economy.
18. The continued alignment of the MBA rate with the policy rate is important to curb arbitrage borrowing opportunities from the window. The Bank continues to monitor the MBA window to ensure that it is not used for speculative purposes. Micro, Small, and Medium Enterprises (MSMEs) Facility.
To avert the collapse of the MSME sector, which was adversely affected by the Covid-19 pandemic, the Bank introduced the MSME facility. This intervention, which is availed to the MSME sector through banks is offered at 75%.
The outstanding amount under this facility was ZW$2.1 billion as at 14 July 2023. Deposit Interest Rates 20. Consistent with the expected inflation profile, savings and time deposit rates in local currency was reduced from 40% and 80% per annum to 30% and 50%, respectively on 1 February 2023.
The Bank maintained the minimum deposit rates on savings and time deposits at 30% and 50% per annum, respectively since 1 February 2023. This is critical to support the savings culture in the country.
Statutory Reserves 21. The Monetary Policy Committee (MPC) reviewed upwards the statutory reserve requirements on local currency deposits, with effect from 7 June 2023. Statutory reserve requirements for local currency demand and call deposits were increased from 10% to 15%, while savings and time deposits were maintained at 5%.
The statutory reserve balances increased from ZW$109 billion on 1 June 2023 to ZW$197.28 billion as of 14 July 2023 partly due to the policy change as well as the increase in the local currency deposit base, emanating from FX purchases.
11 Foreign currency statutory reserve requirements for demand and call deposits were maintained at 10%, while savings and time deposits were maintained at 5%.
Reflecting increased deposits in foreign currency accounts, foreign currency statutory reserve balances increased from US$70.34 million on 6 June 2023 to US$158.82 million as of 14 July 2023.
Gold Coins and Gold-Backed Digital Tokens 23. The gold coins, which were introduced as an alternative store of value, continued to be a critical monetary policy instrument, mopping up over ZW$35 billion from a total of 36,059 coins as of 14 July 2023.
The first maturity after the 180 days vesting period was 25 January 2023 and only 769 gold coins (2% of the total sold) have been redeemed so far, bearing testimony that it is indeed considered a storeof-value.
24. To complement the sale of physical gold coins and expand the value-preserving instruments available in the economy, enhance the divisibility of the investment instruments and widen their access and usage by the public, the Bank introduced Gold-Backed Digital Tokens (GBDT) on 12 May 2023. The GBDT is fully backed by physical gold held by the Bank.
25. As at 21 July 2023, the Bank had conducted 11 issuances of GBDT, receiving a total of 590 applications to purchase tokens valued at ZW$50.50 billion and US$7,794.87. The Bank, therefore, issued 325,024,524 milligrams equivalent to 325.02 kgs of gold.
Foreign Exchange Market 26. The Bank continued to enhance the efficiency and operations of the foreign exchange market by strengthening the Willing-Buyer Willing-Seller trading arrangement.
The introduction of the wholesale foreign exchange auction to address the supply side in the interbank foreign exchange market on the back of the recent liberalization of the exchange rate has seen the parallel market exchange rate premium declining significantly from more than 100% during May 2023 to below 20% and this is expected to narrow further as the parallel market exchange 12 rate appreciates. 27. These interventions in the foreign exchange market supported by tight monetary policy, have resulted in the elimination of foreign exchange distortions and arbitrage opportunities in the economy.
The local currency has as a result begun appreciating against the US dollar since mid-June 2023, as the market corrects towards the market clearing equilibrium. The ZW$/US$ exchange rate gained from ZW$6,926.58 as at 21 June 2023 to ZW$4,771.38 as at 19 July 2023. Figure 2 shows developments in the foreign exchange market for the period from September 2021 to July 2023.
13 In the short term, the Bank will continue implementing tight monetary policy measures to ensure the parallel market premiums remain at acceptable international levels of less than 20%. Foreign Currency Auction
29. During the first seven months of 2023, the Bank allotted a total of US$382.93 million through the Retail Auction System, representing 69.45% of total bids submitted.
Since inception of the Auction System in June 2020, a total of US$4.09 billion has been allotted, representing 85% of the total bids submitted.
14 With effect from 13 June 2023, the Main and SME Auctions were merged into one Retail Auction with a maximum amount of US$5 million per week. The minimum bid for the Retail Auction is US$1,500 and the maximum is US$50,000. Wholesale Foreign Currency Auction 31.
On 7 June 2023, the Bank further liberalised the foreign exchange market and introduced the Wholesale Foreign Exchange Auction in a bid to strengthen the interbank foreign exchange market under the Willing-Buyer Willing-Seller (WBWS) arrangement.
Under this arrangement, the Bank auctions foreign exchange to Authorised Dealers at market-determined exchange rates for them to onward sell to their customers.
32. Since inception, the Bank has held 12 wholesale auctions, with banks submitting bids of around 32% of the amount on offer, largely due to the tight local currency liquidity conditions prevailing in the market.
The Bank has allotted US$95.85 million under the Wholesale Foreign Exchange Auction, representing 91% of the total bids submitted.
On average 12 bids were received per auction, with bids that were way below the market rates, not allotted as they presented arbitrage threats. 34.
The Wholesale Foreign Exchange Auction System has strengthened the interbank foreign exchange market under the Willing-Buyer Willing-Seller (WBWS) and remained central to the determination of the market exchange rate.
Willing-Buyer Willing-Seller Market 35. To complement the Wholesale Foreign Exchange Auction, banks have also been buying foreign currency from the market for trading on the Interbank Foreign Exchange Market.
Cumulative purchases and sales on the Willing-buyer Willingseller market in 2023 were US$112.57 million and US$107.19 million, respectively.
37. The positive trajectory in foreign currency receipts continued during the first half of 2023, with total receipts increasing by 3.5% to US$ 5.595 billion compared to US$ 5.405 billion during the comparable period in 2022.
The increase in foreign currency receipts was driven by exports (55%) and diaspora remittances (16%), as shown in Table 4.
SECTION THREE: RECENT ECONOMIC AND INFLATION DEVELOPMENTS 38. Reflecting waning global economic growth prospects, the IMF’s World Economic Outlook July 2023 is now forecasting a GDP decline from 3.5 % in 2022 to 3.0 % in 2023.
The decline would be mainly driven by advanced economies whose growth is expected to fall from 2.7 % in 2022 to 1.5 percent in 2023. Global headline inflation is, however, expected to start to moderate from 8.7% in 2022 to 6.8% in 2023, benefiting from lower commodity prices, particularly oil.
39. Despite the recent volatility in the exchange rate, the domestic economic prospects remain robust with economic growth projected at 5.3% in 2023, up from the initial forecast of 3.8%.
This growth is on account of better performance by agriculture, mining, ICT and tourism, supported by expected improvements in electricity generation in the second half of the year.
40. The strong growth in the agricultural sector is driven mainly by projected growth in maize, tobacco, wheat, and cotton. Maize output is expected to be more than 2 million tonnes in 2023, up from 1.5 million tonnes in 2022. Tobacco output reached a record high of 295 million kilograms in 2023.
41. The mining sector also continues to support growth, benefiting largely from ongoing investments in lithium production, following a rise in global demand for the manufacture of batteries for electrical vehicles.
42. Gold deliveries that had been affected by incessant rains, particularly for smallscale and artisanal miners, during the beginning of the year have shown significant improvement. Cumulative gold deliveries stood at 14 181 kg by June 2023, as shown in Table 5.
INFLATION DEVELOPMENTS 43. Inflation maintained a downward trend declining from 101.5% in December 2022 to 75.2% in April 2023, on account of tight monetary conditions.
Inflationary pressures, however, re-emerged from April to June 2023, driven mainly by exchange rate depreciation. Accordingly, inflation increased to 86.5% and 175.8% in May and June 2023.
Similarly, monthly inflation which was stable since the beginning of the year rose in May to 15.7% and peaked at 74.5% in June 2023.
44. Inflationary pressures, however, dissipated following the recent bold measures put in place by Government and the Bank, which included the liberalisation of the exchange rate supported by the takeover of the Bank’s external liabilities and the requirement for duties and taxes to be paid in local currency which increased the demand for the local currency.
As a result of the appreciating exchange rate, monthly inflation declined from the peak of 74.5% in June 2023 to minus 15.3% in July 2023 as shown in Figure 4.
Similarly, annual inflation which rose sharply in June 2023 to 175.8% reversed sharply to 101.3% in July 2023 and is expected to progressively decline in the near term as the measures took full effect.
RESERVE MONEY DEVELOPMENTS 46. Reserve money stock stood at ZW$1 064.89 billion in June 2023, compared to ZW$104.04 billion recorded in December 2022.
The increase was largely due to real growth in foreign currency statutory reserves as well as valuation changes associated with exchange rate depreciation. Of the 923.51% growth in reserve money for the period December 2022 to June 2023, 764.06% was attributed to valuation changes.
The inter-bank exchange rate moved from ZW$684.3339 per US$1 as at the end of December 2022 to ZW$5 739.80 per US$1 as at the end of June 2023.
47. In US dollar terms, the value of foreign currency-denominated statutory reserves increased from US$66.19 million in December 2022 to US$157.25 million in June 2023.
The local currency statutory reserves increased from ZW$58.75 billion in December 2022 to ZW$182.61 billion in June 2023. As a result, total statutory reserves (local and foreign currency components), constituted 99.02% of total reserve money, as shown in Figure 6.
