Will RBZ contain Government’s appetite for printing money?

The recently appointed Monetary Policy Committee (MPC) this week announced that the Reserve Bank of Zimbabwe (RBZ) would next month pump in new bank notes and coins into the market to ease the current shortages.

For many who have paid premiums as high as 60% to buy notes from informal traders operating on the sidewalks, this came as music to the ear.

Since the government abandoned the multicurrency regime for a mono-currency system, Zimbabwe’s economy has been facing serious headwinds. Official figures show that exports for the quarter ending June dipped 8.3% to US$860m while imports headed north.

According to the latest figures released by the central bank, the country’s trade balance widened from a deficit of US$165.9m registered in Q1 to a deficit of US$450.7m in the second quarter.

The country’s import bill was mainly composed of diesel, unleaded petrol, crude soya bean oil, medicines, Jet A1, electricity, and road tractors, among others.

Notably, diesel and petrol imports constituted nearly 30.4% against a backdrop of crippling power cuts that have forced both domestic and industrial consumers to rely on alternative sources of energy For a net importer like Zimbabwe, this is not a good picture.

The government has already admitted that the economy would contract by up to 6.5%. Gold production has been spiralling downwards as artisanal miners ditch the state-owned Fidelity Refineries and Printers for side marketers offering hard currency Confronted by these challenges and many more, the authorities have little room to manoeuvre in terms of fiscal discipline and money supply growth.

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The MPC noted that the increase in reserve money by 80% during the first 8 months of 2019, when compared to the December 2018 position, caused instability in the exchange rate and resulted in the increase of domestic prices of goods and services.

The independent committee said measures to ensure money supply growth and contain it within levels that will ensure exchange stability, should be adopted.

This would be an acid test given wage demands by civil servants who have been demanding that salaries be indexed against the United States dollar. Gold producers, who have been selling the commodity to side marketers are also demanding a fair price for the metal.

Should Treasury give in to some of these demands, we will see money supply growth rising rapidly, a development which is inflationary.

As the summer cropping season beckons, monetary authorities will also be under pressure to finance agriculture. Official figures indicate that while there has been a decrease in reserve money by 10 percentage points in September 2019 from the August position, more political will is required to ensure that the central bank carries out prudent activities without interference.

Already the MPC has agreed to continue on this trend to ensure that reserve money growth is contained to 50% for the full year 2019. But with no budgetary support to fund critical government projects such as agriculture facilities for the vulnerable, the central bank could again be forced to turn on the printing press.

Only time will tell.

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Business Times

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