eBusiness Weekly
Taking Stock Kudzanai Sharara
Efforts by Zimbabwean authorities to tighten money supply are proving difficult as the national float continues to balloon beyond targeted growth rates. The southern African country, which is battling with inflationary pressures, is targeting broad money supply growth of 10 percent by year end. However, this target is proving difficult to achieve.
In August 2019, the annual growth in broad money supply continued on an upward trend, registering a 107,37 percent increase to $19,7 billion, compared to 81,98 percent recorded in July 2019 when money supply reached $17 billion.
The RBZ said the growth was underpinned by increases in transferable deposits (demand and savings deposits), 132,53 percent.
Month-on-month, money supply increased by 15,33 percent, from $17,08 billion in July 2019 to $19,69 billion in August 2019.
The Government, which recently established a Monetary Policy Committee (MPC), aims to manage money supply growth through monetary targeting, which is necessary to anchor both price and exchange rate stability.
The two (inflation and exchange rate) have not been stable with annual inflation reaching 175,6 percent at the last count in June, while the exchange rate is forever weakening from a start rate of US$1:ZWL$2,50 to US$1:ZWL$15,77 as at Wednesday this week.
Treasury and the central bank, had hoped to slow down inflation and stabilise the exchange rate, by tightening the money supply, which is the total amount of credit allowed into the market.
The first line of defence would have been open market operations where the RBZ or Government issues Treasury Bills and reduce the amount of money in circulation and mop up inflation.
However, this seems not to be working as the last two issues got a few takers. Out of the $300 million the central bank sought to raise via the last 365-day Treasury Bills early October, total bids amounted to only $81 million, a 27 percent subscription.
The second available option would have been for the central bank to raise the reserve requirement. That’s the amount banks must keep in reserve at the end of each day.
Naturally increasing this reserve keeps money out of circulation, but for an economy where banks are barely lending, this instrument would not achieve desired results as well.
Third, the central bank could raise the accommodation rate. That’s the interest rate it charges to allow banks to borrow funds from the apex bank. This option was activated with the apex bank hiking its bank rate from 15 percent to 50 and finally 70 percent over a short period to discourage speculative borrowing and protect the local currency.
However, none of Zimbabwe’s 18 registered commercial banks has used the Reserve Bank of Zimbabwe (RBZ) overnight window since rates were hiked.
RBZ governor Dr John Mangudya said banks had not borrowed from the central bank to cover short positions because they had enough for their daily operations. Private credit stood at $6 billion in August 2019, from total bank deposits of close to $20 billion, and as a result banks do not require accommodation. This makes the bank rate tool ineffective to curb money supply growth.
With all these options out, the RBZ is left in a catch 22 and might have to use unorthodox means to manage the instability caused by money supply growth. The first thing to do would be to look at what’s causing money supply growth and an analysis of the broad money supply will help.
According to the data provided by the central bank in its report for August 2019, broad money was composed of transferable deposits in domestic currency, 58,76 percent; foreign currency accounts deposits, 29,13 percent; time deposits, 8,22 percent; currency in circulation, 2,85 percent; and negotiable certificates of deposits, 1,03 percent.
The inclusion of foreign currency balances (FCA) in money supply is where most of the growth is coming from and that growth is largely driven by the going exchange rate which has been weakening by the day.
Balances in FCAs amounted to ZWL$5,7 billion in August, up 418 percent from ZWL$1,1 billion in February when the local currency was floated. During that same period the contribution of FCAs to broad money or M3 was just 12 percent in February but now (in August) accounts for 30 percent.
Take these FCA funds out and broad money supply would have grown by approximately 50 percent. While this is still high, it does not ring alarm bells when it comes to money supply growth.
Until the exchange rate stabilises, the inclusion of foreign currency in broad money supply will continue to fuel a growth rate beyond the 10 percent target. Even if the rate stabilises, money supply growth might still be driven by growing export earnings.
The solution could be in modifying our own definition of money supply. It’s allowed. In the United States when measuring inflation, they don’t consider price movements of food and gas (fuel) which can be very volatile. So just like their modified way of calculating inflation, we can have ours in terms of measuring money supply growth and exclude foreign currency balances.
The most important thing for monetary authorities is to manage public perception and expectations. Once people anticipate a certain outcome, there is need to deliver, but the inclusion of foreign currency balances in the calculation of broad money supply makes it difficult for the authorities to deliver. It makes them appear as if they are printing money when they are probably not. It makes people lose confidence and fear for the worst.
Once people anticipate something, they create a self-fulfilling prophecy. Significant growth in money supply is associated with inflation and the more we see the numbers growing by more than 100 percent, the more we panic and plan for future price increases by buying more now, thus driving up inflation or the exchange rate even more.
