eBusiness Weekly
Golden Sibanda
The Reserve Bank of Zimbabwe (RBZ) on Tuesday more than doubled the bank policy rate in order to curb speculative borrowing, support smooth functioning and sustainability of the foreign exchange auction system.
The bank said, effective yesterday, the bank policy rate had been increased from 15 percent to 35 percent, as authorities double down to guarantee success of the new forex trading platform in stabilising the rate and restore sanity in the market.
Generally, bank policy rate is the rate used by central banks to implement or signal its monetary policy stance or preferred interest rate level, which guides the market. It is most commonly set by the central banks’ policy making committees.
The central bank introduced the Tuesday weekly forex auction system last week, to replace the interbank market adopted in February last year, which had been temporarily displaced by a fixed exchange rate regime in late March this year to ensure price stability after the Covid-19 outbreak.
However, the fixed rate system was inevitably scrapped last week after it had been overtaken by events due to huge margins between official and parallel market rates, which had prompted many holders of foreign currency to withhold their money thereby starving the market of the much needed liquidity.
RBZ Governor Dr John Mangudya said the latest intervention was part of broad measures to stabilise and protect the Zimbabwe dollar, which has taken heavy battering since being floated on the interbank early last year.
The resultant effect has been exchange rate volatility, runaway inflation (786 percent in May 2020), loss of confidence in and rejection of the domestic currency scrapped in 2009 after being ravaged by inflation, only to be reintroduced last year as part of fresh economic reforms.
The bank had already cut the bank policy rate twice this year in an effort to increase affordability of funding for productive sectors, including recently to cushion the economy from the effects of the Covid-19 induced lockdown.
Since November 2019, when central bank halved its policy rate to 35 percent from 70 percent, the rate had until yesterday been cut by 55 percentage points in three steps.
“In order to curb speculative borrowing, the MPC resolved to increase the Bank Policy rate from the current 15 percent to 35 percent, with effect from 1 July 2020. The (bank policy) rate will be reviewed from time to time as dictated by prevailing market fundamentals.
“The MPC policy measures taken are envisaged to support the smooth functioning and sustainability of the Foreign Exchange Auction System and stabilisation of the exchange rate and inflation rate,” Dr Mangudya said on Tuesday.
Confederation of Zimbabwe Industries (CZI) president Joseph Gunda recently emphasised the need for authorities to maintain money supply growth or market liquidity within threshold only sufficient to sustain optimal economic activity to protect the value of the local currency.
Many observers also feel that part of the many problems confronting the economy today are a result of excessive money creation, which was not backed by real production, and forms part of idle funds being used to hurt the local currency.
The central bank has made reserve money growth, total value of money in circulation plus other deposits, a part of its key focus this year to protect the value of the Zimbabwe dollar and keep a lid on rampaging inflation, which bolted from a lowly 5,39 percent in 2018 to its current levels.
A series of interventions had earlier been adopted in the same vein, including putting limits on transactions conducted via mobile phone and banking platforms to outright suspension of certain mobile based money transfer facilities.
These platforms have been blamed, amid concerns over weak application of know your customer (KYC) principles, for constantly hurting the domestic currency to the disadvantage of most people, especially the low income earners.
Further, on recommendation of the MPC, the RBZ will also introduce an exchange rate indexed open market operation (OMO) instrument to stabilise the auction-determined exchange rate and preserve value for depositors and investors. The OMO instrument will be open to uptake by both individuals and entities with excess liquidity.
The instrument will be settled in the Zimbabwe dollar, the principal will be linked to the auction determined exchange rate with the instrument earning reviewable interest of 5 percent per annum while its maturity will vary from 30 days to 360 days.
“The MPC urged banks to structure similar exchange rate linked instruments for depositors and borrowers,” Dr Mangudya said.
Meanwhile, the RBZ’s MPC has implored all holders of foreign currency in the country to sell their money to the bank on the auction market at their preferred prices, to enhance the efficiency and effectiveness of the new platform.
The MPC said the holders of hard currency among them exporters, non-governmental organisations, bureaux de change and receivers of remittances can participate on the auction market directly by selling at preferred prices their funds to the RBZ.
At its meeting of June 23, 2020 the MPC said it was pleased with the outcome of the inaugural auction market held on Tuesday last week, which gave rise to the initial market determined exchange rate of 53 to 1, before the second successive auction this week saw the rate rise to 63 against the greenback.
The bulk of applications for foreign currency submitted in the last two auctions held thus far have been successfully funded, giving confidence that the platform will record incremental success with time and help stabilise the Zimbabwe dollar exchange rate and inflation.
“The committee reiterated that the authorised dealers and bureaux de change must serve all entities and individuals in need of foreign currency in between auctions, including those with requirements below the auction threshold of US$50 000, at the ruling market exchange rate,” said Dr Mangudya.
