RESERVE Bank of Zimbabwe on Tuesday lift the lid on the uneven distribution of money supply which is heavily skewed toward a few corporates inadventatnly causing instability in the exchange rate.
The cental bank governor John Mangudya says 50 percent of the ZW$19 billion in deposits in bank accounts is owned by 50 companies while the remainder is held by “all of us.”
Mangudya said the Reserve Bank of Zimbabwe’s Monetary Policy Committee (MPC) which held its inaugural meeting on 28 and 29 October 2019 at the Bank Chambers is convinced that if strict fiscal and monetary discipline are maintained, it will be possible to achieve low inflation and stability within the shortest possible time.
“… the Committee noted that the unequal distribution of money supply, which is heavily skewed toward a few corporates is the main challenge within the economy as opposed to the general level of money supply. This is on the basis that the majority are struggling to afford basic commodities and banks are also constrained by their liquidity levels, while the productive sectors are short of liquidity,” Magudya said.
“In this regard, the Committee resolved to address the challenge of unequal distribution of money supply through appropriate money market instruments which will re-distribute liquidity. To this end, the Committee agreed that measures will be put in place to direct this excess liquidity to the productive sectors, in particular towards the funding of the 2019-20 agricultural season, through the banking system.”
“Going forward, the Committee will uphold strong commitment to reserve money targeting to contain the effects of money supply growth on exchange rate depreciation and its passthrough effects to inflation.”
Mangudya was addressing the media after announcing the impeding introduction of the new ZW$2 and ZW$5 dollar notes to increase the amount of physical cash in in the economy to meet transactional demand.
This comes as current proportion of cash to broad money supply of 4 percent is low compared to the regional and international levels of 10 – 15 percent.
This low ratio has resulted in an undesirable cash premium which the RBZ would like to see eliminated, Magudya said.
“The Committee felt that there was need to boost the domestic avalability of cash for transactional purposes through a gradual increase in cash supply over the next six months,”Magudya said.
“The Committee also noted the need to review upwards the cash withdrawal limits to ease the burden on the transacting public. The additional cash injection will be carried out through the non-inflationary exchange of RTGS money for phycial cash.”
On the exchange rate, the central bank said the current exchange rates may not reflect economic fundamentals based on the balance of payments position.
“The recent trend in the depreciation of the exchange rate was in part occasioned by an increase in reserve money and adverse inflation expectations,” Mangudya said.
“In this regard, the Committee agreed to put in place measures that will minimise monetary shocks and enable the exchange rate to gravitate towards its equilibrium path.”
Turning to the interbank market, Mangudya said the efficiency of the interbank foreign exchange market remains a critical variable for the stabilisation of the exchange rate.
“Accordingly, it agreed to the need for deepening and widening interbank market trading activities so as to attain the desired efficient operation of the market. This should ensure a stable exchange rate and efficient foreign exchange allocation through the market,” Mangudya said.
“The Committee took note that to ensure transparency and effective monitoring, the Reserve Bank will shortly introduce the Reuters system for foreign exchange trading by all banks. Furthermore, the Committee underscored the need for banks to put available foreign exchange balances on the market for trading purposes. In this respect the Reserve Bank will also make efforts to increase the flow of foreign exchange to the market.”
In curtailing the current inflation trends which are largely driven by inflation expectations and temporal shocks from speculative pricing as well as the recent increase in reserve money, Mangudya said several measures will be implemented.
“In this regard, the Committee underscored the following measures to anchor inflation expectations: i. Limiting the exchange rate pass through effect to inflation by stabilising the exchange rate and boosting confidence in the local currency; ii. Enhancing confidence to reverse adverse inflation expectations; iii. Putting in place a credible disinflationary programme which targets attainment of the desired inflation path in the short term,” Mangudya said.