RBZ introduces US$ Savings bonds, hikes rates

Dr John Mangudya

Tinashe Makichi

The Reserve Bank of Zimbabwe (RBZ) has introduced United States Dollar (USD) denominated savings bonds as it seeks to promote savings culture and ensuring reasonable return on FCA nostro account deposits.

In his Monetary Policy Statement delivered Friday, RBZ Governor John Mangudya said the bonds will have an interest rate of 7,5 percent per annum with a minimum tenure of one year with tax exemption, in line with government policy.

The bonds will also have liquid asset status, tradable and acceptable as collateral for overnight accommodation by the RBZ.

He noted that the interest rate on the ZWL$ Savings Bonds shall soon be reviewed to take account of developments on the domestic Treasury Bill market and to motivate banks to provide meaningful return on local currency deposits.

Mangudya hiked overnight rates to 70 percent from 50 percent to “take account of developments on inflation and the exchange rate”.

“The bank expects inflation to start declining after the current high inflation cycle ends, as attested by ebbing exchange rate depreciation pressures, following the removal of the multi-currency system,” Mangudya said.

Mangudya said measures put in place by government to strengthening fiscal sustainability and promoting a flexible exchange rate system
have therefore set the right conditions for a sustained economic recovery and growth.

“The current levels of broad money supply of around ZLW$15 billion and the country’s monthly foreign exchange receipts of US$400 million,
coupled with fiscal consolidation, should ideally go a long way in stabilising the exchange rate and containing the pass-through effects of exchange rate depreciation to inflation,” he said.

Mangudya said the re-introduction of the local currency and the subsequent withdrawal of the US Dollar as a transactional currency imply that RBZ should issue adequate notes and coins to support economic activity.

The increase in the demand for physical cash of late worsened cash shortages, as reflected by unending queues at most banks in thecountry.

He said failure to get cash is undermining the confidence in the local currency as well as forcing economic agents to resort to the illegal transactions in foreign currency and to selling cash at a premium.

“Our estimation, based on the country’s historical cash levels and practices in neighbouring countries, shows that the currency in circulation should be between 10-15 percent of broad money supply.”

Mangudya said a tight monetary growth target will continue be implemented to promote stability in the exchange rate and inflation.

To this end, RBZ will take necessary open market operations and utilise the instruments at its disposal to ensure that a tight reserve money programme is implemented aimed at keeping reserve money growth rate to no more than 10 percent by end of 2019.

He said the apex bank is concerned by the depressed levels of productivity and their implications on both exchange rate stability
and potential output of the economy.

This, Mangudya said, will see RBZ introducing measures and incentives to encourage banks to increase long term lending to enhance credit to
the private sector to support economic growth.

Under this framework, banking institutions with loan maturities of above two years in their loan portfolios will be able to use their commercial loan instruments as collateral for borrowing from RBZ.

This measure is meant to break the cycle of short-termism in the credit market as well as encourage banks to promote long term savings on their portfolios.

Mangudya doubled banking sector capitalisation to ZWL$200m for top tier banks by 2020 “in order to support risks associated with their business activities”.

In the outlook, Mangudya said a more positive outlook on exchange rate and inflation is, expected in the medium to long term on the back of necessary supportive policy interventions and conditions are already in place.

These interventions include the discontinuation of central bank financing of Government deficits to curtail money supply growth, upward review of the bank rate to curtail speculative lending and the implementation of a tight monetary regime when necessary, coupled with a flexible exchange rate system, among others.

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