RBZ mops up $2bn excess liquidity

The Reserve Bank of Zimbabwe (RBZ) savings bond has to date attracted $2 billion from the market, and now accounts for around 20 percent of all the real time gross settlement (RTGS) balances.

The RBZ has given current RTGS balances levels at circa $10 billion.

The central bank started issuing the savings bonds-which have a seven percent annual return-to individual and institutional investors in September 2017 to raise money to fund Government business.

Last week, RBZ governor Dr John Mangudya said the savings bonds had accumulated $2 billion, almost double from June last year.

“Liquidity sterilisation efforts through the Bank’s savings bonds, have continued to bear fruit, mopping up a total of $1,96 billion worth of liquidity, since their introduction in September 2017,” Dr Mangudya said.

The maturity periods for the bonds vary from one year to five years releasing pressure to liquidate them all at once.

The savings bonds were initially announced in the August 2017 Monetary Policy Statement in which Dr Mangudya put across the paper as a catalyst in empowering the banking public.

Excess liquidity has numerous negative consequences on the economy, not least on inflation, a view shared by analysts at Akribos Research Services.

“A major contributor to inflation has been the fact that deficit financing mechanisms have resulted in increased money supply (RTGS and bond notes).

“The increase in broad money supply has been mainly driven by the issuance of government sovereign paper to augment its financial needs, which are then liquidated by institutions and individuals.”

Broad money growth, however, fell from close to 50 percent in July 2018, to 28,8 percent by November 2018, reaching a stock of $10 billion as of the same month, according to the RBZ.

Inflationary pressures

Economist Persistence Gwanyanya has said the RBZ-issued debt securities have so far done well in sterilising the market, but could be affected by inflationary pressures going forward.

Zimbabwe’s inflation is expected to continue rising until October, but is expected to stabilise thereafter, according to the central bank.

“The savings bond has so far worked well in attracting excess liquidity sloshing in the economy that’s why RTGS balances of $1,8 billion are significantly lower than money supply of around $10 billion.

“However, the continued growth of this bond will largely depend on how well inflation will be managed. The successful operation of the recently introduced inter-bank foreign currency market will make a huge difference in containing the rising inflation,” he said.

“If the rising inflationary trend continues into the future, investors will be discouraged to invest in money market instruments, due to low or negative return on these instruments. So really the key major target of RBZ today, of course supported by Treasury, is to fight inflation and achieve currency stability.”

Another analyst Joseph Mverecha says liquidity (although critical for economic performance) should always be moderated.

“Production, though aided by liquidity, is really a function of supply side factors – our investment in capital, technology, labour and of course also availability of foreign exchange. These are the key determinants of production, output and value addition.

“Too much liquidity often translates into asset price bubbles, with visceral effects on the economy – these may include property, vehicles or even foreign exchange, as economic agents seek to hedge against loss of value,” said Mverecha.–herald.co.zw