Chronicle Editor
Michael Tome, Harare Bureau
THE World Bank says Zimbabwe should maintain its tight monetary policy stance and resist spending pressures to keep the lid on inflation and ensure durable exchange rate stability.
Inflation in Zimbabwe tracks the movement in the exchange rate, meaning stability in the domestic currency, which is influenced by the level of money supply in the economy, is one of the most critical factors to maintaining stability.
According to the World Bank, there was a significant surge in money supply at the beginning of 2024 but the introduction of ZiG in April last year successfully restored price stability.
The southern African country, however, faces difficult choices in restraining expenditure given the huge competing interests amid limited financial resources, as the economy recovers from years of battering from Western sanctions, which also closed all access to concessional funding.
Zimbabwe battled bouts of high inflation in the first quarter of 2024, amid significant expenditure on key infrastructure, rekindling fears the country would plunge into hyperinflation similar to what happened in 2008, which wiped out people’s hard-earned savings and pensions.
The International Monetary Fund (IMF) estimated that inflation reached 500 billion percent during the hyper-inflationary era.
The country is charting a completely new course, with low inflation and a stable exchange rate, which businesses say if sustained, could support long-term growth and allow greater predictability in the economy.
According to economists, quasi-fiscal operations and spending beyond the budget were the major sources of instability that drove prices and exchange rate volatility in the past.
Both Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube and Reserve Bank of Zimbabwe Governor Dr John Mushayavanhu, have committed to tight fiscal and monetary policies to engender durable stability.
Several measures have been instituted to support the fiscal and monetary policy positions, including demanding the payment of certain taxes and import duties in the local currency to create demand.
“Maintain RBZ’s tight monetary policy stance and resist renewed (fiscal) pressures to ensure low inflation and exchange rate stability,” said the World Bank in an update on Zimbabwe’s economy last week.
The Bretton Woods institution’s call comes after another influential multilateral lender, the IMF, said last week that Zimbabwe’s economy was recovering from the impact of the El Nino-induced drought, which weighed on growth in 2024.
Zimbabwe’s economy, due to the impact of drought, grew by 2 percent last year but is projected to expand by 6 percent this year following favourable rains received across the country.
Agriculture is one of Zimbabwe’s key sectors, along with mining, tourism and manufacturing.
The RBZ has committed to sticking to policies that promote price, currency and exchange rate stability by maintaining a tight monetary policy stance with the overarching objective to foster central bank policy consistency and credibility.
“The new RBZ establishment is focusing on maintaining stability, so forget random printing of money; it is now a thing of the past. In this regard we will prudently calibrate the liquidity conditions in the market to curb speculative activities,” said RBZ Deputy Governor Dr Innocent Matshe during a panel discussion at a breakfast meeting arranged by the CEO Roundtable on Thursday last week.
He said the RBZ will continue to carefully navigate the dual objectives of reducing inflation and supporting robust economic growth, acknowledging the inherent trade-off between these two goals.
Dr Matshe said to achieve this balance, the central bank will judiciously manage market liquidity to prevent speculative activities and ensure a stable economic environment.
In September 2024, the Reserve Bank reinforced its tight monetary policy stance by increasing the bank policy rate and statutory reserves to mitigate inflation and exchange rate risks. The central bank policy rate is the rate that is used by the RBZ to implement or signal its monetary policy stance.
This move successfully alleviated inflationary pressures from October 2024 onwards and as a result, Zimbabwe’s monthly inflation rate plummeted from 37,2 percent in October 2024 to 3,7 percent in December 2024.
The decline was primarily driven by exchange rate stability, marked by a significant reduction in parallel market premiums.
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