Sustained stability to anchor continued economic growth: RBZ

A COCKTAIL of comprehensive economic policy interventions put in place by the Government in tackling the transitory price and exchange rate volatility are bearing fruit as the economy is responding favorably amid strong indications that the prevailing stability is sustainable in the medium to long term.

Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya, said this in his Mid-Term Monetary Policy Review Statement issued on Wednesday where he stated that policy measures have gone a long way in arresting speculative behavior and restored the much-needed normalcy in the price and exchange rate dynamics.

The prevailing normalcy, he said, is critical in anchoring the robust economic growth projected at 5,3 percent in 2023, supported by a good performance by the agriculture and mining sectors, recovery in tourism and expected improvements in electricity generation in the second half of the year.

Among the top measures to restore stability is the suspension of duty on the importation of basic goods, 100 percent retention on domestic sales in foreign currency starting this month, and fine-tuning the Foreign Exchange Auction System, among others.

The RBZ has already started the pre-announcement of an envelope of US$15 million allocation at the forex auction, which is expected to stabilise the exchange rate.

The Treasury also took charge of collecting foreign currency surrendered by exporters, with the proceeds used to service RBZ external loan obligations.

As the economic stabilisation measures continue to hold, on Tuesday, the market continued to push down the rate of the local currency against the US dollar to $4 559.

The measures have paid off with stability of the exchange rate in turn anchoring price stability and driving demand for local currency in domestic transactions, which economic agents had been avoiding due to its volatility.

To ensure full benefits from the measures, Dr Mangudya said the apex bank’s monetary policy stance will be maintained during the six months to December 2023, with appropriate revisions being done in line with inflation developments.

“The strong growth in the agricultural sector is driven mainly by projected growth in maize, tobacco, wheat, and cotton. Maize output is expected to be more than two million tonnes in 2023, up from 1,5 million tonnes in 2022.

“Tobacco output reached a record high of 295 million kilograms in 2023. The mining sector also continues to support growth, benefiting largely from ongoing investments in lithium production, following a rise in global demand for the manufacture of batteries for electrical vehicles,” he said.

Dr Mangudya added that the robust macroeconomic fundamentals as evidenced by a healthy balance of payments, fiscal sustainability, higher manufacturing sector capacity utilisation, improved foreign currency receipts relative to foreign payments and continued monetary restraint will anchor the obtaining price and exchange rate stability in the medium to long term.

“In this context, the bank strongly believes that the current stability is sustainable in the medium to long term,” observed Dr Mangudya.

He said the bank continued to enhance the efficiency and operations of the foreign exchange market by strengthening the willing-buyer, willing-seller trading arrangement.

The introduction of the wholesale foreign exchange auction to address the supply side in the interbank foreign exchange market on the back of the recent liberalization of the exchange rate has already seen the parallel market exchange rate premium declining significantly from more than 100 percent during May 2023 to below 20 percent and this is expected to narrow further as the parallel market exchange rate appreciates, said the Governor.

“These interventions in the foreign exchange market, supported by tight monetary policy, have resulted in the elimination of foreign exchange distortions and arbitrage opportunities in the economy,” he said.

“The local currency has as a result begun appreciating against the US dollar since mid-June 2023, as the market corrects towards the market clearing equilibrium.

“The ZW$/US$ exchange rate gained from ZW$6,926.58 as at 21 June 2023 to ZW$4,771,38 as at 19 July 2023.”

According to Dr Mangudya, the strong macroeconomic fundamentals obtained in the economy suggest that the exchange rate instability witnessed between May and June 2023 was not a result of monetary factors but a reflection of adverse behavioural factors and insatiable demand for foreign currency by economic agents.

“The measures instituted by the bank, which include further liberalization of the exchange rate, tighter monetary policy and the introduction of gold coins and gold-backed digital tokens are bearing fruit as evidenced by the current firming and relatively stable exchange rate dynamics,” he said.

“The ongoing intervention in the foreign exchange market through the wholesale auction system is exerting a dual effect of mopping up excess liquidity and re-establishing the optimal mix of the dual currencies, thus sustaining the current exchange rate and price stability.”

Since 2019, Zimbabwe has registered positive balance of payments and is projected to close the year with a surplus of US$274,5 million.

“Money supply growth has been under control as evidenced by the slow growth in local currency lending since January 2023. Similarly, the financial sector has remained safe and sound with adequately capitalised institutions that can underwrite lending to support the growth trajectory,” said Dr Mangudya.

“The strong monetary and financial position has been corroborated by sustained fiscal stability where the Government continues to manage its fiscal position within internationally acceptable ranges of fiscal deficits,” he added.