Prudent liquidity management crucial to deal with inflation, rates volatility

Prudent liquidity management remains key to taming inflation and exchange rate volatility in the short to medium term, according to FBC Securities.

This comes as the economy has witnessed continued strengthening of the Zimbabwe dollar against the US Dollar following a series of policy interventions put in place by monetary authorities to mop up excess local currency liquidity.

Some of the recent strategic interventions introduced by authorities include a directive for all import duties to be paid in Zimbabwe dollars, except for luxury items; the transfer of external payment obligations from the Reserve Bank of Zimbabwe (RBZ) to the Treasury; and the introduction of the wholesale foreign currency auction for banks.

Further, Treasury has also directed that all Government institutions collect fees and charges in the local currency and that 50 percent of corporate tax payments be made in Zimbabwe dollars, while the central bank raised its bank policy rate from 140 percent to 150 percent.

FBC Securities said in its latest first half of 2023 review and outlook report that without careful liquidity management, increased money supply may have a destabilising effect on the economy in the second half of 2023.

“Currency dynamics, including distortions presented by a widening parallel market rate premium, pose a threat to economic stability.

“We believe convergence of the official and parallel market rates is a possibility, hinged primarily on the accelerated liberalisation of the foreign exchange market, combined with continued efforts to maintain an appropriately tight monetary policy for the sustainable restoration of macroeconomic stability,” it said.

The research firm said while the first half of the year was characterised by erratic power supply that resulted in business disruptions and ballooning operating costs, there have been some improvements in power supply.

However, general improvements in power supply should bode well for businesses in the second half, if sustained. An improved power supply will limit disruptions to operations as well as reduce operating costs,” reads part of the report.

FBC Securities said that in view of the upcoming elections and uncertainty around the money supply and possible disruptions, the authorities’ commitment to the tight monetary policy aimed at restoring and sustaining exchange rate and inflation stability remains encouraging.

The Government projected local economic growth of 6 percent this year, up from initial forecasts of 3.8 percent, and this comes on the back of improved agricultural performance and increased electricity availability.

“Huge injections of liquidity into the economy may potentially undermine these efforts as there exists a strong correlation between money supply, exchange rate and inflation, as evidenced by spikes in the depreciation of parallel market rates that have coincided with bulk payments by the Government to service providers.

“Unless carefully managed, increased liquidity owing to increased Government expenditure may have a destabilising effect on the local economy in the second half of the year, resulting in further devaluation of the currency and loss of value,” the firm said.

The Confederation of Zimbabwe Industries (CZI) recently said the continued strengthening of the Zimbabwe dollar against the US Dollar is good for the economy, especially if sustained in that direction.

CZI president, Kurai Matsheza, said that while it is too early to determine the sustainability of the appreciation, the performance of the three previous weeks is good for the economy.

“We need to give it time and then see what happens in the next couple of auctions and also what happens to the parallel market,” he said.

Already, some service providers in the market have started reducing their Zimbabwe Dollar prices, while parallel market rates are slowly subsiding.-ebusinessweekly