Back to Basics
The Reserve Bank of Zimbabwe delivered the highly anticipated 2024 Monetary Policy Statement (MPS) amidst a multi-currency system characterized by exchange rate and inflation volatility. Throughout 2023, the central bank maintained a tight monetary policy stance typified by high interest rates, stringent liquidity management and management of foreign exchange to foster price and exchange rate stability. Regardless, the prospects of the local currency remained under pressure under the multi-currency system due to exchange rate and inflation volatilities. Although the parallel rate premium was maintained below 30% for the greater part of 2H23, the trend reversed, with the premium widening to above 50% in December and January driven by excessive demand for foreign exchange. Monthly inflation eased from a peak of 12.1% in June 2023 to an average of 2.1% up to December 2023 because of the contractionary measures implemented by the central bank and government. However, this year has seen resurgence, with inflation peaking at 55.3% in March 2024, driven by rapid local currency depreciation. The domestic economy is estimated to have grown by 5.5% in 2023, down from 6.5% in 2022, buoyed by agriculture, mining, ICT and tourism. The ongoing El Nino induced drought is impacting the domestic economy’s growth trajectory however, with growth in 2024 forecast at 3.5%. Globally, economic growth is forecast to remain stable at 3.1% in 2024, with tight fiscal and monetary policies stunting growth in advanced economies. Global inflation is forecast to decline steadily from 6.9% in 2023 to 5.8% in 2024 due to tight monetary policies and easing commodity prices. The domestic economy continues to operate amidst increased underlying global risks and vulnerabilities because of tight global financial conditions, geopolitical tensions and extreme weather events.
Money Supply Dynamics
Local currency constituted less than 20% of total money supply, reflective of the level of dollarization of the economy. Reserve money stock stood at ZWL$2.02tn as at December 2023 from ZWL$1.06tn in June 2023, reflecting ZWL$748.44bn expansion in statutory reserves. Statutory reserves were bolstered by the change in reserve requirement ratio and growth in deposit base, resulting in statutory reserves constituting 98% of total reserve money. Broad money stock was ZWL$18.87tn as at year end from ZWL$14.27tn in June 2023 due to expansion in transferable deposits. The Bank attributes the 708.87% y/y growth in broad money stock to a surge in foreign currency deposits in the banking sector, which was supported by steady foreign currency receipts. As at year- end, foreign currency deposits, local currency deposits and local currency in circulation constituted 83.01%, 16.94% and 0.05% of money stock, respectively. By January 2024, money stock stood at ZWL$29.25tn, a 55% surge on the year-end figure, attributed to the impact of exchange rate movements.
Banking Sector Performance
The Bank notes that the sector experienced general stability in the face of shocks emanating from a dynamic operating environment. Increased confidence in the sector was evidenced by sustained growth in foreign currency deposits in correspondent banks from circa US$400mn in 2018 to US$2.4bn in 2023. Average capital adequacy ratio for the sector at 37.34% remained above the regulatory minimum of 12%. All 18 banking institutions reported core capital levels in compliance with minimum capital requirements. Asset quality remained satisfactory with an NPL ratio of 2.09%, which is well within the internationally accepted 5% threshold. The improvement in NPL ratio from 3.62% as at June 2023 reflects sound credit management practices and internal controls within the banking sector. Aggregate core capital increased to ZWL$6.31tn in December 2023 from ZWL$5.05tn in December 2022 due to organic growth. Increased dollarization levels and prohibitive ZWL interest rates skewed the market towards foreign currency-denominated loans, accounting for 84.67% of sector’s loan book, whilst 72.68% of lending was to the productive sector. Non-interest income accounted for 84.27% of sector’s total income as at December 2033, but our observation is that 47.56% was in the form of revaluation gains, which are noncash.
Recalibration of Monetary Policy Framework
During the first quarter of 2024, the ZWL depreciated by 74% against the greenback on the interbank market, whereas the parallel market rate depreciated by 70%. On this backdrop, the MPS’s main focus is on immediate measures necessary to boost demand for local currency, with the aim to re-anchor price and exchange rate stability and re-monetise local currency as a reliable medium of exchange and store of value. The policy is anchored on the following five policy measures.
- Introduction of new structured currency: The MPS is accompanied by SI 60 of 2024, introducing Zimbabwe Gold (ZiG) which is anchored by a composite of foreign currency and precious metals (mainly gold) held as reserves by the central bank. 1 ZiG is equivalent to 1mg of gold. Banks are to convert all Zimbabwe dollar balances into ZiG at a swap rate determined by the closing interbank rate as at 5 April 2024 and London OM Fix price of gold as at 4 April 2024. ZiG will co-circulate with other foreign currencies in the economy.
- Anchoring local currency on reserves backed by gold and foreign currency balances: The Bank can only issue domestic notes and coins backed by the basket mix of hard currency (currently US$100mn cash) and foreign-currency-denominated assets (gold worth US$185mn at present). The total ZWL component of reserve money is ZWL$2.6tn, estimated by the Bank to be equivalent to US$90m. Therefore, the reserve holdings currently with the bank represent roughly 3 times cover for the local currency being issued.
- Efficient and optimal money supply management: This will entail containment of reserve money growth within limits of growth in gold and foreign currency reserves as well as discontinuation of quasi-fiscal activities and alignment of interest rates. Bank policy rates have been reviewed downwards to 20% per annum from 130% per annum to reflect the new currency dynamics.
- Adoption of a market-determined exchange rate system: The Bank has discontinued the auction system and replaced it with an interbank foreign exchange market under a willing-buyer-willing-seller trading arrangement. The Bank will provide trading liquidity to the market using the 25% export surrender proceeds to support the foreign exchange management system to guarantee successful restoration of currency and exchange rate stability.
- Other support measures and obligations in response to market demands: Measures to boost demand for ZiG in the market will include a mandatory requirement for companies to settle at least 50% of their tax obligations on QPDs in ZiG.
Our thoughts
The economy has been moving towards full dollarization, with over 80% of transactions conducted in US dollars as reduced confidence in the ZWL dwindled its market share. Businesses are predominantly funding themselves in foreign currency, evidenced by the high proportion of foreign-currency-denominated loans in the banking sector. In our view, these new measures reflect efforts to preserve the current status quo in terms of the multi-currency regime and are unlikely to interfere with functioning of other currencies as they affect roughly 20% of money supply. The lack of further interference with foreign currency retention ratios for exporters is critical given the vulnerabilities posed by the ongoing drought and falling commodity prices. The requirement for 50% of QPD payments to be in ZiG creates steady demand for ZiG, which should theoretically strengthen it. We therefore expect a relatively stable USD:ZiG rate for as long as ZiG remains anchored. The economy will likely remain pseudo-dollarized in the short-to-medium term, which is vital for stability, with the extent of migration to ZiG based on confidence. It is likely however that some form of parallel market will emerge as a significant portion of the population remains unbanked and it is yet to be seen what level the parallel rate will settle at. The Bank did note recovery of foreign currency inflows during the first two months of 2024, suggesting healthy growth of reserves. Whilst an anchored currency theoretically restricts money supply growth thereby arresting inflation, key downside risks remain discipline in maintaining tight money supply and vulnerabilities to fluctuations in gold prices and supply. In addition, the currency is inflexible, which may affect the ability to finance the 25% surrender portions or large infrastructure projects. Entities carrying ZWL obligations will however lose the hyperinflationary reprieve that erodes the real value of their obligations with this crystallization of loan values, possibly exerting pressure on them. The ZSE will need to rebase to the new currency, which may result in initial distortions in valuations. The uncertainty around performance of ZiG compels us to lean more towards defensive stocks with strong dividend policies in case valuations remain distorted, impacting capital gains. In our IH Universe, presenting high dividend yields are Delta (6.7%), Simbisa (5.2%) and Axia (11.2%).
