Tighten money supply, ZNCC tells RBZ

LIVINGSTONE MARUFU

 

The central bank should tighten money supply  to deal with resurgent  inflation, the Zimbabwe National Chamber of Commerce (ZNCC) has said.

The chamber said  the grain, tobacco and infrastructure rehabilitation projects could fuel inflation.

In its latest survey report, the ZNCC  said the Reserve Bank of Zimbabwe (RBZ) should come up with more interventions to control inflation.

“Government expenditure towards the payment of road construction and rehabilitation contractors, grain deliveries and the local currency component of tobacco farmer payments has had unintended consequences through fuelling growth in local currency transferable deposits.

“The statistics indicate a contradiction to the central bank’s tight monetary policy stance. While central bank comments on money supply growth have mainly focused on stability in reserve money growth, there has been significant growth in money supply growth.

“The monetary authorities should extend the tight monetary policy stance to M1 growth (particularly local currency denominated transferable deposits) to reduce resurgent inflationary pressures,” part of the report reads.

In October, the central bank introduced special exchange rate-linked corporate open market operations bills as it tightens money supply in the wake of a rise in annual inflation.

The bills target corporates with huge local currency balances or those receiving huge payments in local currency amid revelations some of the funds are being used to destabilise the foreign exchange market.

However, the Zimbabwe Commercial Farmers Union president Shadreck Makombe told Business Times that the farmer should be paid accordingly to ensure higher productivity levels.

“If some people feel that we are fuelling inflation, the authorities can pay us in hard currency and this is the scenario we always wanted as we are procuring everything in foreign currency,” Makombe said.

The local currency and FCA components of transferable deposits grew by 588% and 575%, respectively.

The growth in local currency transferable deposits used for day-to-day transactions, including the buying of forex on the parallel market has pushed the money supply growth.

Between January 2020 and September 2021, there was a 620% increase in the black-market rate, from about US$1: ZWL$25 to the current US$1: ZWL$180, which can be attributed to the growth in local currency transferable deposits.

This has resulted in the persistent increase in the parallel market premium against the backdrop of a stable foreign exchange auction rate.

ZNCC president Tinashe Manzungu said there is a hive of activity on the black market, with recipients of diaspora remittances supplying a significant chunk while illegal/informal gold buyers, businesses who cannot access the auction market and general economic agents sustain the demand.

“The denomination of prices of some critical commodities such as fuel in foreign currency does not help the situation,” he said.

ZNCC said given the persistent excess demand, the parallel market premium would maintain the upward trajectory, driving the prices of goods and services up.

The foreign exchange auction system, which has as of October 14 2021 dispensed over US$2bn since its inception in June 2020, has ensured uninterrupted financing of importation of key raw materials and equipment for the productive sectors of the economy.

Businesses feel that more needs to be done to improve the auction system.

“The central bank should expedite interventions aimed at improving the efficiency of the foreign exchange auction market. The full tenets of the Dutch auction system should be adopted and preceded by the clearance of the backlog,” ZNCC said.

Business also warned the government to maintain fiscal discipline during the election season as this is critical for improving the low business confidence.

The central bank put in place a reserve money growth target of 25% per quarter in 2020, which was reduced to 22.5%, beginning January 2021.

 

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