Money supply gallops on exchange rate depreciation

Broad money (M3) stock went up by $300 billion or 45 percent between April and May 2022, latest data from the Reserve Bank of Zimbabwe shows.

Finance and Economic Minister Mthuli Ncube recently acknowledged that broad money could be fueling currency depreciation.

Addressing a Political Actors Dialogue (POLAD) Currency Indaba mid-June 2022, the Treasury chief said, among other interventions, Government had made a commitment to ensure zero growth in broad money supply.

“So, growth in money supply is well contained in terms of M0 growth, but we noticed that perhaps when it comes to broad money, that growth has remained positive and that has partly contributed to part of the currency volatility that we have seen; so we are dealing with that.

“On the monetary front, we have a strategy of containing growth in money supply, both reserve money and broad money,” said Minister Ncube.

According to the Monthly Economic Review for May 2022, M3 stood at $971,54 billion in May 2022, compared to $671,37 billion recorded in April 2022.

“The money stock was largely composed of foreign currency deposits, 57,55 percent; and local currency deposits, 42,13 percent,” reads the Monthly Report in part.

This means the bigger portion of the growth was on the back of exchange rate depreciation during the period under review.

Month-on-month, broad money increased by 44,71 percent, largely reflecting an increase of 85,05 percent in foreign currency deposits, from $302,16 billion in April 2022 to $559,14 billion in May 2022.

Again, the increase was on the back of exchange rate depreciation.

Over the same period, the local currency component of broad money grew by 11,70 percent.

During the month under review, net domestic claims increased by 32,33 percent to $671,65 billion.

The growth was largely due to increases of $122,19 billion and $13,62 billion in credit to the private sector and net claims on Government, respectively.

On an annual basis, broad money registered a growth of 245.00 percent, largely driven by the impact of exchange rate depreciation over the year, the RBZ said.

The auction rate moved from $84.73/US$ in May 2021 to $290.88/US$ in May 2022, resulting in growth of the $ equivalent of FCA deposits, from $127,55 billion in May 2021 to $559,14 billion in May 2022.

The local currency component of broad money also grew by 167,70 percent over the same period, reflecting significant credit creation in the banking system, the RBZ said.

The annual growth in broad money was largely driven by increases of 316,99 percent and 286,02 percent in credit to the private sector and net claims on Government, respectively.

Net credit to Government included treasury bill holdings by the banks, as well as the accounting for drawdowns on the special drawing rights (SDR) reserves, by Government, the RBZ explained. Credit to the private sector mainly benefited the agriculture and household sectors, which received 27,08 percent and 20,40 percent of the total credit, respectively. The distribution and manufacturing sectors also received 134,4 percent and 11,19 percent, respectively.-ebusinessweekly