Zimbabwe’s foreign currency earnings defied the disruptive negative impact of the Covid-19 pandemic to register a 29 percent growth to US$4 billion in the first six months of this year, compared to US$3.12 billion achieved in the same period last year, the Reserve Bank of Zimbabwe (RBZ) said yesterday.
This comes as the central bank said it was working with the Deposit Protection Corporation, to explore ways of protecting foreign currency deposits held by banks to give the institutions comfort to lend to productive sectors.
The RBZ contends this will incentivise banks to deploy a cumulative US$1,7 billion in foreign currency account deposits the banks have not been willing to extend to starved productive sectors.
In his 2021 mid-term monetary policy review, which was little changed from his statement in January this year, RBZ Governor Dr John Mangudya said inflationary pressures in the economy had dissipated. Dr Mangudya said with current policy measures yielding desired results, there was little propensity to tinker, but needed to focus more on staying the course, which has seen the economy responding positively. He said the domestic economy, on account of a conducive monetary and financial environment, was projected to grow by 7.8 percent, as earlier pronounced by Finance Minister Mthuli Ncube.
A bumper harvest, which saw record maize output and strong tobacco and tobacco production among other standout crops, and anticipated global mineral prices boom would anchor domestic growth. The central bank chief said the apex bank was confident that the current stability of inflation and Zimbabwe dollar exchange rate, supported by a buoyant external sector, would continue in the outlook period.
Dr Mangudya said the external sector had largely been driven by the recovery in the global economy, projected to expand by 6 percent this year, which has sparked a rally in commodity prices. Similarly, tobacco prices have been firmer at an average of US$2.92 per kilogramme during the just ended marketing season compared to last year, which helped show up foreign exchange earnings.
Despite the Covid-19 pandemic, which forced global economies to shut down under strict lockdowns, disrupting production, trade and supply channels, Zimbabwe’s foreign inflows remained resilient.
“On account of the strong external sector performance, foreign currency receipts have remained buoyant, with US$4.02 billion having been received in the first half of the year, representing a 29.1 percent increase in foreign currency supply into the economy.
“Of this amount, Diaspora remittances through the formal system amounted to US$649 million, an impressive 73 percent increase from the US$374.6 million received during the same period in 2020,” he said.
Dr Mangudya said anticipated recovery of the global economy in 2021 and spillover effect of stimulus packages in developed countries and Asia, as well as $650 billion equivalent of Special Drawing Rights from International Monetary Fund, would positively impact recovery in Zimbabwe.
“These positive economic developments are key in sustaining the foreign exchange auction system, which had a significant impact on the national economy since its inception on the 23rd of June 2020,” he said.
The weekly foreign currency auction market, for both large and small enterprises, has to date disbursed US$1.7 billion for procurement of key raw materials and equipment for productive sectors.
After the 56 main and 50 small enterprise auctions, the central bank governor said the total amount that has been disbursed thus far to key productive sectors represented 98 percent of total bids submitted to the auction.
Notably, he said the efficient allocation of the scarce foreign currency through the RBZ administered weekly auctions has been credited with increased confidence and growth in the domestic economy.
“Capacity utilisation in the manufacturing sector has, as a result, increased from 36 percent in 2019 to 47 percent in 2020 and is expected to further increase to 61 percent in 2021,” Dr Mangudya said.
Further, he said ramping up of industrial production had been necessitated by increased investment after the auction system outlaid a cumulative US$350 million utilised by businesses to capitalise operations. Among key policy positions that remained unchanged was the bank policy rate, which remained at 40 percent after being reviewed in the first half of the year from the previous 30 percent.
Dr Mangudya said the monetary authorities had during the half year to June 2021, continued to undertake open market operations in line within the central bank’s reserve money targeting framework.
Also unchanged was the current position on the quarterly reserve money growth target, which was set at 25 percent in 2020, reduced to 22.5 percent in January 2021 and cut further during the half year to 20 percent for the last two quarters.
“This move was necessitated by heightened speculative pressures on the parallel market, which have a potential destabilising effect on price stability,” the central governor said in the MPS statement.
He said following the reduction in the quarterly reserve money target, reserve money will now be contained within the target of $29 billion by end of September and no more than $35 billion by December 2021.
The governor said the bank will continue to review the reserve money target in line with inflation and exchange rate developments in the country, which for most of this year have been largely stable. He said as a result of the bank’s conservative monetary targeting policy under the reserve money targeting framework, banks’ monthly average liquidity stood at $17 billion in January; fell to $13 billion in June and $12.6 billion by end of July 31, 2021. Dr Mangudya also highlighted that the bank’s medium term bank accommodation facility, extended on highly affordable terms, which was introduced in November 2019 to mainly support agriculture, had positively impacted production.
On account of funds given to wheat farmers in 2020 under the facility the country achieved a decent wheat output of 161 332 metric tonnes, which saw the country cutting on imports and preserving scarce forex.
“The outstanding amount under the medium term bank accommodation facility stands around $4,3 billion. In May 2021, the MPC (Monetary Policy Committee) approved an additional $2,5 billion for winter wheat farming,” he said.
The interventions are available to banks at an MPC determined interest rate of 30 percent per annum. Participating banks can only charge a maximum of 10 percentage points above the RBZ’s rate, which means they cannot lend above 40 percent.