RBZ mops up ZWL$250bn

PHILLIMON MHLANGA

The Reserve Bank of Zimbabwe (RBZ)  has mopped up more than ZWL$250bn excess cash from the market in the past two months using a variety of methods, including non-negotiable certificates of deposit (NNCDs), gold coins and the wholesale forex auction system, among many other instruments, it has been established.

The development was revealed by the RBZ governor, John Mangudya who explained that the move was part of the monetary authorities’ contractionary monetary policy approach.

“The bank continued to mop up excess liquidity from the market through the issuance of non-negotiable certificates of deposit (NNCDs). In this regard, the outstanding NNCDs as of 14 July 2023 amounted to ZW$163.5bn,” Mangudya said.

He added: “The gold coins, which were introduced as an alternative store of value, continued to be a critical monetary policy instrument, mopping up over ZW$35bn from a total of 36,059 coins as of 14 July 2023. The first maturity after the 180 days vesting period was 25 January 2023 and only 769 gold coins (2% of the total sold) have been redeemed so far, bearing testimony that it is indeed considered a store of value.

“To complement the sale of physical gold coins and expand the value-preserving instruments available in the economy, enhance the divisibility of the investment instruments and widen their access and usage by the public, the bank introduced gold-backed digital tokens (GBDT) on 12 May 2023. The GBDT is fully backed by physical gold held by the bank.  As at 21 July 2023, the Bank had conducted 11 issuances of GBDT, receiving a total of 590 applications to purchase tokens valued at ZW$50.50bn and US$7 794.87. The Bank, therefore, issued 325,024,524 milligrams equivalent to 325.02 kgs of gold.”

Excess liquidity  had been used to support parallel market activities.

To support the local currency and provide the market with an alternative investment option, the central bank introduced tokenized digital coins. This was done to change the market’s behavior from the usual practice of chasing after US dollars on the black market.

The instruments are expected to stabilize the value of the Zimbabwean dollar and can be used to make payments between people and businesses.

The central bank stepped up its wider market sterilisation  efforts after Zimbabwe experienced significant exchange rate depreciation between April and June 2023 driven by both demand and supply factors, which exerted significant pass-through to inflation.

The demand factors were primarily driven by increased demand for foreign currency as a store of value.

The effect of the high demand for foreign currency on the economy was coincided with the sudden decline in the demand for local currency due to speculative behaviour, including exchange rate indexation at excessively undervalued or over-depreciated exchange rates.

Moreover, supply factors resulting from a temporary decline in foreign currency receipts as a result of falling export commodity prices, such as the Platinum Group of Metals. On the other hand, the unfavorable supply trends have since changed.

“The bold policy intervention measures instituted by the government and bank for tackling the transitory price and exchange rate volatility have gone a long way in arresting the instabilities and bringing the much-needed normalcy in the price and exchange rate dynamics and calmness in domestic markets. This normalcy will be critical to anchor the robust economic growth projected at 5.3% in 2023, supported by a good performance by the agriculture and mining sectors, recovery in tourism and expected improvements in electricity generation in the second half of the year,” Mangudya said.

Mangudya said the strong macroeconomic fundamentals obtained in the economy suggest that the exchange rate instability witnessed between May and June 2023 was not a result of monetary factors but rather by unfavorable  behavioural factors and insatiable demand for foreign currency by economic agents.

Mangudya claimed that the current firming and comparatively stable exchange rate dynamics were proof that the bank’s measures, which include further liberalization of the exchange rate, tighter monetary policy, and the introduction of gold coins and gold-backed digital tokens, were bearing fruits.

Mangudya also claimed that the  recent introduction of the wholesale auction system was also having the dual effects of mopping out excess liquidity from the market and re-establishing the ideal ratio of the dual  currencies, sustaining the current exchange rate and maintaining price stability.

As a result of the deft policy measures, Zimbabwe has witnessed a significant correction in the exchange rate which had overshot its equilibrium.

The correction in the exchange rate has led to a concomitant correction in prices, Mangudya said.

As a result, the steep increase in month-on-month inflation from 15.7% in May to 74.5% in June 2023, significantly reversed in July 2023 to minus 15.3%.

Similarly, the annual inflation which had risen from 86.5% in May 2023 to 175.8% in June 2023, fell to 101.3% in July 2023.

“The bank remains confident that the continued sale of gold coins and gold-backed digital tokens will sustainably take away steam from the store-of-value demand for local currency during the short to medium term, with positive spinoffs on the substance of obtaining price and exchange rate stability. Furthermore, the bank’s strategic resolve for continued monetary prudence will add further impetus to the positive prospects of the local currency over the medium term. In addition, the ongoing monitoring and surveillance by the Financial Intelligence Unit will effectively minimise incidences of exchange rate manipulation and abnormal pricing practices,” Mangudya said.