Keep a lid on ZiG liquidity to anchor rate stability: CZI
ZIMBABWE’s largest industrial lobby group, Confederation of Zimbabwe Industries (CZI), says authorities must keep a tight lead on Zimbabwe Gold (ZiG) market liquidity to maintain low inflation and a stable exchange rate.
CZI said in Zimbabwe, inflation of the local currency was largely exchange rate driven.
The influential business lobby group made the comments in its inflation and currency developments update for October 2024.
While the economy has largely dollarised, an estimated 30 percent of domestic transactions are still conducted in the domestic currency.
Both monetary and fiscal authorities have recently affirmed their commitment to maintain tight fiscal and monetary policies, although some analysts have raised alarm over the potential impact on inflation of the Treasury’s near-double projected growth in revenue for 2025.
However, the industrial group noted that the jump in inflation in October was largely in line with the devaluation of the exchange rate in September 2024 by the central bank, which saw the exchange rate increasing by 74 percent to 24,39.
Following the official rate adjustment in September to address pricing distortions, Zimbabwe was only about 12,8 percentage points from reaching the hyperinflation level.
“Such huge shocks in the exchange rate are not helpful in giving confidence to the local currency, hence the need to ensure that a market-determined exchange rate prevails,” CZI noted.
CZI said since the introduction of ZiG in April 2024, until September 2024, the official rate depreciated by only 3 percent.
On September 27, 2024, the Reserve Bank of Zimbabwe suddenly devalued the domestic unit, CZI said, noting that the devaluation did not result in convergence with the parallel market buying rate, which also depreciated on the same day.
However, due to the limited supply of ZiG in the market, the depreciation in the parallel market was not sustained, as ZiG started appreciating on the parallel market rate from the 30th of September 2024.
The industrial lobby group said that this resulted in a decline in the exchange rate premium to a low level of 27 percent on the buying rate by mid-October.
“However, since mid-October, the upward pressure on the buying rate at the parallel market began to resurface, which pushed the premium to about 46 percent on October 31, 2024.
“The sources of liquidity that drove the parallel exchange rate towards the end of October need to be addressed, as the trend in the parallel market has demonstrated that the parallel market rate can indeed appreciate under tight liquidity,” CZI said.
According to CZI, the ZiG inflation surge in September and October 2024 confirms that inflation in Zimbabwe is exchange rate-driven.
“The inflation outlook generally hinges on the ability to stabilise the exchange rate. While a market-determined exchange rate might not necessarily stabilise the exchange rate if liquidity is not properly managed, it ensures that there are no sudden shocks to inflation in the future.
“Thus, the inflation outlook in Zimbabwe largely depends on how ZiG liquidity would be managed as well as whether the exchange rate is market-determined. Measures that create demand for the local currency, such as having taxes payable in local currency, would help cement inflation stability.”
Presenting the 2025 national budget statement to Parliament last week, Finance, Economic Development and Investment Promotion Minister, Mthuli Ncube, said inflation in 2025 was expected to remain low.
“In 2025, ZiG inflation is expected to remain stable, with an average month-on-month inflation of below 3 percent, on the back of tight fiscal and monetary policies,” he said.
Authorities have made similar pledges in the past but things still went on to unravel.
He said since the introduction of the new currency, the ZiG, in April 2024, the official exchange rate remained stable between US$1: ZiG13,5 and US$1: ZiG14 from April to September.
“This stability led to subdued inflationary pressures, as inflation expectations firmly anchored.
“However, following the monetary policy changes announced on September 27, 2024, the official exchange rate depreciated significantly to US$1: ZiG24,88.
‘Similarly, the black-market exchange rate also registered a depreciation to a high of US$1: ZiG40 during the same period, before declining to around US$1: ZiG35 as at October 4, 2024,” he said.
To address the inflationary pressures since September, the MPC implemented stabilisation measures that included increasing the bank policy rate and standardising statutory reserve requirements for deposits.
The MPC also allowed greater exchange rate flexibility and reduced the limit on foreign exchange individuals can take out of the country, Mthuli added.
“In the outlook period, the exchange rate is expected to remain stable following the Monetary Policy Committee policy pronouncements of September 27, 2024, which have already addressed most of the emerging exchange rate pressures,” the Minister said.
In keeping with its tight monetary policy stance, the RBZ’s monetary policy committee (MPC) maintained the bank policy rate at 35 percent while it also did not change the statutory reserves ratios at 15 percent for savings and time deposits and 30 percent for demand and call deposits.
The MPC reaffirmed its resolve to closely monitor developments in inflation and the exchange rate, adjusting its policy stance as needed.
“The measures we introduced in September have delivered positive outcomes, with monthly inflation decelerating from 37,2 percent in October to 11,7 percent in November.
“Our goal is to sustain these gains and ensure that inflation expectations remain well-anchored,” said RBZ Governor Dr John Mushayavanhu, who chairs the MPC.
Additionally, the bank reiterated its commitment to enhancing the efficiency of the interbank foreign exchange market.
It also noted that the Treasury’s new tax law allowing corporate tax payments in a 50/50 US$: ZiG arrangement, would increase the number of willing buyers and willing sellers in the forex market and help anchor the stability of ZiG.
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