Money supply growth accelerates in June

Published: 23 September 2019
The Reserve Bank of Zimbabwe (RBZ) released its monthly economic review for June detailing monetary statistics for the 2019 half year. The report comes in the build up to Governor Dr. John Mangudya's upcoming monetary policy statement that is expected to be presented soon.
The year has seen a series of monetary policy changes in the government's efforts establish economic stability through the resolution of economic imbalances. Most of those targets fell under the objectives of the Transitional Stabilization Program (TSP). A key monetary policy target of the program was mopping up the excess liquidity that caused the divergence between value of the USD and RTGS balances. Other measures have also centered around managing the country's significant public and foreign debt loads that accumulated to finance fiscal deficits.
Arguably, the most significant monetary policy development saw the RBZ bow to pressure by allowing the devaluation of RTGS balances and establishing an interbank foreign currency exchange market under a pegged rate policy. Later the peg was eased as the RBZ implemented a willing buyer-seller policy to exchange rate in a bid to improve trading on the forex markets. This objective was supported by the "official" reintroduction of a domestic currency along with the removal of the multi-currency regime.
The introduction of the exchange rate system has cast a bigger spotlight on reigning in money supply. Measures undertaken so far have seen the RBZ hike its overnight lending rates to 50% in a bid to mop up excess liquidity allegedly being channeled into the parallel exchange markets. Meanwhile, the exchange rate has continued to depreciate on the interbank market, recently passing $11, leaving the total depreciation at 364% since the initial devaluation.
Of late, the rates trajectory has become a major source of debate as economic observers attempt to rationalize the sustained devaluation and the source of liquidity driving it. The situation presents a contradiction to the aforementioned policy towards reigning in money supply growth. Observers have pointed to the lack of clarity on how exactly the projected $4.5 billion fiscal deficit will be financed with the implication that the funding gaps will be monetized. On the other hand, the liquidity crunch has been fairly pronounced on the ZSE where market activity has hit new all-time lows.
According to the RBZ report, at the end of June the country's monetary base totaled $3.6 billion with $87.6 million of it in bond coins, $510.2 million in bond notes and $2.88 billion from transferable electronic balances. The total figure was up by 42% from the end of May as electronic balances rose by 55% during the month, which was attributed to the rising value of foreign currency deposits. Those deposits grew by 31% in nominal terms from $2.7 billion to $3.6 billion and by 4.5% from US$518 million to US$541 million.

Broad money (M3) stood at $ 14.78 billion in June 2019, compared to $8.84 billion recorded in June 2018. This represented a year-on-year growth of 66.99%. Month -on-month, broad money increased by 13.52%. The monthly growth, was partially attributed to a 72.89% expansion in foreign currency deposits, which was attributed to the exchange rate depreciation. An adjustment for the foreign currency component shows that domestic balances grew by 9% during the month. This is a relatively sharp acceleration considering growth averaged 0.08% between the preceding 8-month period since the launch of the TSP.
Regarding the debt management efforts, domestic claims against the central government stood at $7.7 billion from $6.5 billion at the end of May. In real USD terms, the domestic debt stock was down to US$1.1 billion, an 82% decline from US$6.2 in October 2018. The government has implicitly acknowledged the adverse impact of the situation on bank, which are the primary holders of government debt securities. Subsequently, the RBZ has implemented a debt assumption program, which will see it assume foreign currency legacy debts from banks on a 1:1 basis. foreign liabilities for deposit corporations stood at US$581 million in October 2018 and US$530 million at the end of January 2019. The figure stood at $1.9 billion at the end of June, equivalent to US$289 million.

The RBZ's net foreign asset position stood at -$14.6 billion or –US$5.8 billion using the official interbank rate at the end of June. In USD terms, the position has declined by 301% since October 2018, meaning net foreign liabilities have increased by US$$4.4 billion since then. This increase likely relates to the Afrexim loan facilities acquired by the RBZ to facilitate fuel and other commodity imports, while a presumably small portion relates to debts from the assumption program.
All in, the statistics paint a picture of monetary policy management at odds with the objectives set against it. After a relatively stable phase, the spike in June is curious, especially considering the more recent acceleration of the exchange rate devaluation. The issue partially stems from the RBZ's general approach to monetary policy management, which tends to be vague and lacking in detail. In this scenario, it feeds into the confusion of whether the developments are part of a strategy or just something that is happening. The statements from Minister of Finance Mthuli Ncube that the country had a positive capital account balance during the 2019 half year adds a further layer of uncertainty about the sustained pressure on the exchange rate. His rationalization was a high risk premium for the ZWL, which has to partially stem from the uncertainty surrounding monetary policy.
Admittedly, the situation is undeniably complex, given the need to balance the need to recessionary liquidity versus ensuing recessionary impact. Additionally, it is undeniable that monetary policy reform alone is only part of economic puzzle, along with fiscal and institutional reform. Hence, formulating a clearly defined monetary policy management strategy has to be a key point of Mangudya's upcoming monetary policy statement. Beyond that, there is the need for more policy co-ordination between the RBZ and Treasury. This need for coordination also extends to key economic sectors that are directly affected by the monetary policy changes. Particularly in banking, where the unclear mechanics behind the debt assumption program are increasing operating risks and compromising the security of the local financial sector.
- finx
Tags: money,


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