RBZ ramps up fight against inflation, pledges financial stability

PERSISTENCE GWANYANYA

The Reserve Bank of Zimbabwe (RBZ) has reaffirmed its commitment to a tight monetary stance, maintaining the bank policy rate at 35% and statutory reserve ratios at 30% and 15% for current account and savings as well as time deposits respectively, across both ZiG and US$ holdings.

This position outlined in the 2025 Monetary Policy Statement (MPS) released last week, underscores the central bank’s resolve to curb inflation and stabilise the financial system.

However, as with any stringent monetary measures, the policy has not come without consequences.

Weak consumer demand has led to rising corporate distress, forcing businesses and economic agents to adapt to the new economic reality.

To survive in this new environment, the Government, business and households might have to downsize or rightsize.

Rightsizing may take some significant reduction in Government or toning down aggression on mainly infrastructure projects.

Alternatively, and/or additionally, the Government has to be more efficient, its employees fit for purpose, with zero tolerance to leakages, wastage and pilferage.

Similarly, business has to be more efficient and strategically aligned as the era of arbitrage-driven profits is coming to an end.

In some cases, reversal of some strategic decisions will be necessary.

This may unfortunately include rationalisation of labour as businesses seek competitiveness in an environment of weak demand.

Households should also adjust both their lifestyles and expectations.

The new economy cannot afford extravagance, over-dependence on the Government, including embezzling from it.

However, as monetarists postulate that instability is always and everywhere a monetary phenomenon, the RBZ sees the tight monetary policy stance as the basic ingredient for sustaining price and exchange rate stability.

 

Adjusting to new reality

The economy has been stable since the last quarter of 2024, as Monetary Policy Committee (MPC) measures of September 27, 2024 took effect, supporting continuation with the tight monetary policy stance in 2025.

There may be need to adjust from overconsumption to saving, which supports the rebalancing imperative necessary to rebuild the economy. External factors, mainly the United States policy on aid, are not helping our case.

It is concerning that the Trump administration has closed USAID at a time we have been receiving an average of US$300 million in development assistance from the institution yearly. Treasury puts development assistance for 2024 and 2025 at US$862 million and US$800million, respectively.

Importantly, banks have to quickly unwind their forex and illiquid positions, which they might have accumulated when it was fashionable to bet and arbitrage with the local currency.

In any case, the RBZ has proposed to set upper limits of forex exposure by banks towards compliance with Statutory Instrument (SI) 205 of 2000.

This SI prescribes limits of 10 percent and 20 percent of net capital base.

Importantly, the upward review of the deposits rates for both ZiG and US dollar savings and time deposits, as well exemption of transactional charges for transactions of up to US$5, are seen boosting confidence in the financial system.

The ZiG savings deposit rate has been increased from 3,5 to 5 percent, whilst the rate on time deposits has been increased from 5 to 7,5 percent.  The US dollar savings deposit  rate has been reviewed to 2,5 percent from 1 percent, whilst time deposit rate is now 4 percent from 2,5 percent. Minimum deposits of US$100 remain exempted from bank charges, signalling RBZ’s commitment to revive savings culture as well. And,as banks unwind their positions, we expect increase in ZiG liquidity in the market. However, increase in liquidity will not help our situation as the key issue remains its distribution.

The RBZ indicated that since September 2024, the market has been long with +/-ZiG1 billion every day, reflecting inefficiency of the interbank market.

Banks with excess liquidity are not keen to invest with banks in short positions ostensibly on account of real and perceived risk.

Historical experience of losses suffered during hyperinflation could be the other reason for this reluctance.

Interestingly, banks would rather prefer to get their excess liquidity wiped away by the RBZ at zero interest rates through non-negotiable certificates of deposit (NNCDs) than to trade with a counterpart in short positions.

One is tempted to think that is why discount houses were necessary in the past.

Discount houses would play the intermediary role between banks and the central bank, and among themselves.

There may be need to wrap our minds around the possible role of discount houses in the market.

Regarding the accessibility and usage of ZiG, the RBZ envisages increased uptake of the currency as economic activities pick up.

As farmers receive part payment of ZiG for mainly maize, tobacco and wheat at a time when the local unit is relatively stable, the RBZ team will be upscaling the publicity and marketing of the currency, especially in rural areas.

Sustaining ZiG stability

Sustaining stability shall require focus on convertibility and store-of-value attributes of ZiG. The structured nature of the local currency, which requires it to be fully covered by foreign reserves in the form of foreign currency and precious minerals, will continue to support its convertibility.

At ZiG14,3 billion (US$550 million), foreign reserves provide more than three times cover to the ZiG reserve money of ZiG3,5 billion as at January 31, 2025. Interestingly, the foreign reserves have surpassed the total ZiG money supply in the economy, which provides added comfort to ZiG convertibility.

As ZiG delivers on convertibility for foreign payments, the market confidence will boost even its appropriateness for value preservation. However, in the absence of robust demand for ZiG, this is not enough to usher in permanent stability, which is key to the restoration of ZiG’s store-of-value function.

Importantly, the Government has already started to implement measures to drive demand for ZiG, with payment of income tax (QPDs) in 50:50 ZiG/US dollar proportion in the last quarter of 2024 being the most notable development so far.

We expect implementation of more measures to drive ZiG demand as the year progresses. Whilst the demand for ZiG is important, supply of forex is equally vital for sustained stability. Given the structural nature of our economy, typified by concentration of forex in the hands of a few large corporates and individuals, the reduction of foreign currency retention from exports from 75 percent to 70 percent was necessary as it is in line with the dedollarisation road map.

Reflecting the need to cushion exporters from possible exchange rate depreciation, the RBZ provided an option for this constituency to invest the increased portion of 5 percent in the USD-denominated deposit facility (USDDDF), which will be reassessed in need and at the going exchange. This is an improvement from investing the same in Treasury Bills (TBs), which expose exporters to exchange rate risk.

Whilst forex inflows have been increasing since 2019, with healthy balance of payment (BOP) positions recorded over the period, the trade deficit has remained significantly high, which could also explain the motivation to reduce the export retention ratio.

Preliminary estimates indicate a current account surplus of US$501,2 million in 2024 from a surplus of US$133,9 million during the comparative period in 2023, whereas the trade deficit has remained high at US$2,1 billion.

This notwithstanding, a projected increase in gold production to 40 tonnes this year, from 36 tonnes in 2024, is seen as driving royalties needed to build the reserves to support our local currency.

The external sector dynamics only demonstrate the urgent need to harness forex sloshing over the economy from the current account items such as diaspora remittances.

Harnessing forex from the market requires measures to aggressively drive financial inclusion, as informalisation takes its toll.

Clearly, these measures are beyond monetary policy. It is advisable for fiscal authorities to continually review their tax regime to reflect the realities on the ground whilst incentivising compliance. Complementarity between monetary and fiscal aspects cannot be overemphasised.

However, whilst a return to permanent stability is possible, there is more work and a lot of sacrifice to do.  Importantly, permanent stability requires the combined efforts of all economic players.

As demonstrated in the 2025 MPS, monetary authorities are expected to judiciously manage money supply, which explains the insistence with tight monetary policy stance.

Fiscal authorities are expected to underwrite ZiG by driving robust demand for the currency. Given the operation of a multi-currency regime, it is tempting for business to pursue arbitrage, as opposed to competitiveness, which calls for responsible business practice.

The temptation is equally high for households to bet on the currency and frustrate efforts to stabilise it.  The RBZ’s commitment to rebuild confidence is quite comforting, just as the indication that new high-quality notes will be introduced this year.

Confidence-rebuilding measures will go a long way in supporting the month-on-month inflation target of 3 percent, which is needed to achieve year-end inflation of 20-30 percent.

Persistence Gwanyanya is an economist, chartered banker and a member of the RBZ Monetary Policy Committee. He is also the founder and CEO of Bullion Group International. He can be contacted on email [email protected]

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