adminOliver Kazunga Senior Business Reporter
THE country’s reserve money supply growth continues on a downward trend with official data indicating a 11,5 percent decline to $11,81 billion as at August 14, 2020 from $13,35 billion in the previous week.
Reserve money refers to currency in circulation and deposits with commercial banks and other bank deposits to the same. Generally, a decline in reserve money growth entails that the country is moving towards lowering inflationary pressures that in recent months were triggered by exchange rate volatility.
Following the introduction of the foreign exchange auction trading system towards the end of June this year, Zimbabwe is moving towards stability of the exchange rate while promoting price discovery on the market. In an update on reserve money released last week, Reserve Bank of Zimbabwe (RBZ) said:
“Reserve money continued on a downward trend, falling further to $11,81 billion on 14th August 2020, from $13,35 billion recorded on the 7th of August 2020, largely reflecting a decrease of $1,05 billion in banks’ liquidity (banks balances at RBZ).”
Other deposits at the Reserve Bank also declined by $696,23 million over the week under review. In his 2020 mid-term monetary policy statement announced last week, RBZ Governor Dr John Mangudya said the forex auction trading system has brought some positive developments in the financial market. In response to the volatility in the pricing of goods and services due to the rising parallel exchange rate premium, the Apex Bank replaced the fixed exchange rate system, which had the domestic currency pegged at $25 per US dollar, with a foreign exchange auction system.
“Since its introduction on 23 June 2020, a total of US$137,4 million has been allotted against bids for US$157,8 million at the end of 9th auction on 18 August 2020,” said the Governor. He noted that effectively the auction system has to date served 87,1 percent of the formal foreign exchange market demand. Total foreign currency allotments have ranged between US$10,3 million and US$18,8 million per auction.
“The foreign exchange auction system has greatly assisted in improving transparency in the foreign currency market and has facilitated the discovery of a market-based exchange rate. In addition, the system has been critical in fostering exchange rate and price convergence over time,” said Dr Mangudya.
“The dispersion between the highest and lowest bid rates on the auction system has been converging towards the weighted average exchange rate, while the parallel market premium has remained suppressed.”
Dr Mangudya said the dispersion between the highest and lowest bid rates, which was around 75 points at the beginning of the auction had fallen to about eight points after the ninth auction. In the first quarter, the Central Bank announced that it aimed to maintain a tight monetary stance targeting reserve money growth not exceeding 15 percent by the end of the year.
This is meant to improve exchange rate stability as well as taming inflationary pressures, which are often linked to growth in money supply. The monetary authority has attributed the growth in money supply in 2019 to subsidies on fuel, electricity, grain and Government expenditure.
Bongani Ndlovu