The growth of the money supply induces the weakening of the Zimbabwean dollar

In Tuesday’s Reserve Bank of Zimbabwe auction results, the Zimbabwean dollar (Zimdollar) fell slightly against the greenback 0.16% to ZW 84,1197 from a close of ZW 83,9830 the week before. The interbank depreciation rate continues to decline thanks to the increase in the supply of foreign currency and the decline in base money levels.

Although the spread between the parallel rate and the official rate continues to widen to over 40%, it has been stable for four weeks and shows signs of moderation. In particular, the Zimdollar has lost around 3% of its value on the interbank since the start of the year, which raises the question of whether this race will be maintained. Well, a possible increase in the money supply in the coming months is likely to weaken the Zimdollar further.

During the week ending March 12, the reserve currency declined from ZW $ 1.91 billion (US $ 22.7 million) to ZW $ 18.72 billion (US $ 222.6 million) ) against ZW $ 20.55 billion (US $ 244.3 million) in the previous week. This is mainly due to a reduction in RTGS balances from banks to RBZ. Meanwhile, the currency in circulation also declined by ZW $ 24.06 million (US $ 286,087).

Government deposits to the central bank increased by ZW $ 3.08 billion ($ 36.6 million) as businesses began to prepare for the March 2021 quarterly tax payments. effect of removing liquidity from the market. The decrease in reserve currency was partially offset by an increase of ZW $ 116.83 million (US $ 1.39 million) in bank reserve requirements.

Reserve currency refers to currency in circulation plus commercial bank deposits with the central bank. It is generally referred to as base currency or high power currency, which implies that it has a greater propensity to impact monetary stability compared to M2 and M3 (broad money).

The central bank aims to bring reserve currency growth under 22.5% per quarter in 2021, up from 25% in 2020, with the aim of keeping relative inflation under control and the stability of the rate. changes that the country is currently experiencing.

This is a positive development as excessive growth in the money supply has been one of the main drivers of inflation. The reduction in the reserve currency growth target is also in line with the target for year-end inflation below 10% and economic growth of 7.4%. With the harvest season at bay, Zimbabwe assumes a production of between 2.5 million and 2.8 million tonnes of maize and 360,000 tonnes of traditional cereals, which could prove to be the highest yield achieved since that the agrarian reform was inaugurated in 2000.

In addition to the expected harvest, the government needs ZW $ 60 billion (US $ 713.4 million) to purchase corn from farmers this marketing season. RBZ chief Dr John Mangudya last week allayed fears that government accounts would not meet payments for corn deliveries to the Grain Marketing Board (GMB) despite holding ZW $ 13 billion (154 billion , $ 57 million) against needs of about ZW $ 60 billion. arguing that the requirements were spread over four months (without needing to borrow from RBZ).

However, according to precedents, this is likely to trigger money supply growth as this is a situation that would force the monetary authorities to print more money, ultimately triggering inflationary pressures in the market.

Meanwhile, the central bank increased the reserve requirement ratio (RRR) on all demand deposits from 2.5% to 5%. Since statutory reserves are a component of base currency, increasing the RRR has the effect of increasing reserve currency balances.

In my opinion, this RRR adjustment is an assertion by the authorities that the local currency is not yet fully stable. By increasing the ratio, it reduces the amount available to banks for discretionary lending. In addition, the Bank’s key rate for overnight accommodation was increased by 500 basis points. This decision penalizes speculative borrowing. In the meantime, the economy is expected to recover slightly in 2021, mainly supported by expectations of a recovery in external demand thanks to progress in vaccinations, good performance in agriculture and the gradual relaxation of restrictions linked to Covid-19 .

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

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

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