Analysis of Monetary Policy resolutions to stabilise ZiG

RECENTLY, the Reserve Bank of Zimbabwe (RBZ), through its Monetary Policy Committee (MPC), announced significant monetary policy shifts aimed at stabilising the local currency, the Zimbabwe Gold (ZiG).

A few months after the RBZ launched it into the market in early April 2024, the ZiG experienced frequent increased fluctuations, particularly in the alternative (parallel) markets.

Key highlights

On September 27, the MPC instituted the following measures:

Immediately increased RBZ’s benchmark policy rate from 20% to 35%.

Immediately increased and standardised statutory reserve requirements for demand and call deposits for the ZiG and USD deposits to 30% from 15% and 20%, respectively.

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Immediately increased statutory reserve requirements for savings and time deposits for ZiG and USD from 5% to 15%.

Reduced foreign currency one can take out of Zimbabwe to US$2 000 from US$10 000.

To allow for greater exchange rate flexibility, in line with increased demand for foreign currency. Context On April, the ZiG officially replaced the Zimbabwe local dollar (ZWL) after the latter had experienced an accelerated decline of about 72,3% of its initial value against the US dollar (USD) in the official market (year-to-date terms).

The excessive deterioration of the ZWL occurred only in three months ended March 31 2024.

 To tame this excessive depreciation of the local unit, the monetary authority adopted the ZiG as a structured local currency at an official exchange rate of 13.5685 per US$1.

A structured currency is a currency that is pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets like gold. At the time of ZiG's introduction, the RBZ indicated that this local unit was backed by the central bank reserve asset holdings constituting US$100 million in cash and 2,5 tonnes of gold (worth US$185 million at the time).

The RBZ viewed the combined US$285 million worth of reserve assets as adequate to provide full cover of reserve money in the system, which totalled about ZW$2,6 trillion (US$90 million equivalence at the time).

This would mean that holding other factors constant, the ZiG money supply growth is limited to the growth of RBZ’s reserve asset holdings.

So, hypothetically, this arrangement could restrict the ability of the monetary authority to print ZiG willy-nilly, thus subduing exchange rate depreciation and price inflationary pressures.

With this interpretation in mind, I applauded authorities for the ZiG concept as it was expected to instil monetary discipline and help clamp rapid dollarisation of the economy.

However, only a few months after some sense of stability, the ZiG has started to depict the same characteristics as the ZWL, which is unexpected for a structured currency.

This development is reminiscent of June 2020, when the Dutch foreign currency auction system was introduced. Hard data shows that for the first few months of the auction market, the ZWL and inflation were subdued before they started to go haywire.

The MPC has since devised some monetary policy strategies to address the current anomaly and save the ZiG from suffering the same fate as the ZWL.

Analysis of MPC

Measures A benchmark policy rate is the RBZ's key lending rate, which it uses to regulate the economy's availability, cost, and use of money and credit. By increasing the benchmark policy rate, the MPC intends to discourage speculative borrowing in the economy.

However, with the massive spike in parallel market rates in recent weeks, 35% seems too inadequate to deter rent-seeking. As such, the public expects the MPC to hike the rate further in the coming weeks.

The MPC has also increased the statutory reserve ratio (SRR). The RBZ uses the statutory reserve requirements for liquidity management.

A high SRR ratio means a large portion of commercial banks’ deposits is locked in RBZ’s vaults and, therefore, is not available for on-lending by banks, thus constraining credit expansion.

However, since the SRRs are mostly non-interest bearing, an SRR that is too high poses an increased opportunity cost to banks, prevents full utilisation of savings, and increases the cost of financial intermediation.

In addition, the MPC has limited individuals' foreign currency exports to only US$2 000 per trip. The move intends to subdue foreign currency demand pressure in the formal markets.

While this policy action will also likely deter forex externalisation, it may drive the public away from the formal banking channels and harm informal cross-border trade. All this promotes a cash economy (mattress/pillowcase banking) that encourages corruption and underhand dealings, thus rendering fiscal and monetary policies ineffective.

Furthermore, the MPC has resolved to allow for greater exchange rate flexibility. The Bank devalued the ZiG by at least 40%, from

about USD/ZiG 14 to USD/ZiG 25. Although this policy shift raises concerns about whether reserve assets back the ZiG or the exchange rate market-determined, this devaluation was long overdue as the official rate was now overvalued.

Before the official devaluation, the parallel market premia – percentage differences between official and parallel market rates – had widened unsustainably.

By allowing exchange rate flexibility (operation of market forces of demand and supply), the RBZ intends to collapse the exchange rate premium and stabilise the ZiG. However, the sharp official ZiG decline had significantly suppressed real incomes, likely negatively impacting public service delivery (budget constraints), consumer aggregate demand, business investment, hiring, and national output growth.

The above monetary policy measures taken by authorities will go a long way in stabilising the local currency. For sustainable development and attainment of Vision 2030, Zimbabwe must strive to gravitate toward a mono-currency regime.

This is because near-full dollarisation disadvantages the country relative to its regional peers, as domestic firms are rendered uncompetitive. A small nation's use of a strong currency (US$) on global demand reduces it into a supermarket economy, as unsustainable import bills eliminate domestic manufacturing and kill jobs.

Moreover, with a mono-currency regime, a nation can enjoy monetary policy autonomy by printing its currency whenever needed.

Mono-currency regimes can seek relief from their money printing rooms (central banks) during severe economic downturns, major bank runs, or natural disasters.

This option will be unavailable if foreign currency is used instead. For such scenarios, one of the viable solutions will be public borrowing either locally (increases interest rates, thus crowding out private sector investment) or externally (increases the default risk and being in another country’s pocket ruins credit ratings).

• Sibanda is an economist. He is a research associate with Zimcodd. He is  a staunch advocate for inclusive and sustainable development. He writes in his personal capacity.