Batanai Matsika 
THE Reserve Bank of Zimbabwe (RBZ) recently published an update indicating that reserve money declined by ZWL1,4 billion to ZW16,1 billion as at the week ending October 23, 2020. The decline reflected a fall of ZWL1,5 billion in banks’ deposits at the RBZ.
This was mainly due to foreign currency sales to the market by the RBZ and liquidity mopping through issuance of open market operations (OMO) savings bonds.
Reserve money is an important indicator of money supply in the economy given that it represents the base level since it is the high-powered component of money supply.
As illustrated in the info-graph, the components of reserve money are (i) currency in circulation, (ii) Banking Sector’ Deposits with RBZ and (iii) Other deposits with RBZ. The currency in circulation includes notes and coins while bankers’ deposits represent balances maintained by banks in the current account with the RBZ (mainly for maintaining cash reserve ratio). Other deposits with the central bank includes deposits from multilateral financial institutions.
The management of reserve money is a critical aspect of the monetary policy since it decides the level of liquidity and price level in the economy (inflation). Monetary authorities in Zimbabwe have largely been managing the exchange rate, price levels and inflation expectations by controlling liquidity or money supply growth.
As Morgan & Co Research, we have indeed witnessed some level of stability on the exchange rate front over the past couple of months. We highlight that there has also been a cocktail of measures such as (i) the introduction of the FX auction system, (ii) transaction value limits on mobile money platforms and (iii) suspension of fungibility of dual-listed stocks, amongst others.
As we write this article, we have observed that liquidity taps at the RBZ are tightly closed. On the stock market, prices have largely remained subdued given the lack of ZWL liquidity. In our view, the current scenario points to a toothpaste tube effect.
The toothpaste tube theory states that increasing pressure eventually forces some sort of release, just as when one squeezes a toothpaste tube and toothpaste comes out. It is based on the notion that if you squeeze a toothpaste tube at one end inevitably toothpaste will be pushed out of the other.
The theory also shows that pressure that has built up in some finite bounded system needs to be released somewhere or the system will break. In addition, a toothpaste tube is sealed on all sides but one; so, no matter where pressure is applied it will pour out only from one end.
One application of the toothpaste tube theory is in terms of domestic demand and exports. When exports cannot be directly increased by pushing for supply, governments try to control domestic demand. By reducing home demand, they automatically have enough stock available to achieve their desired exports.
In the context of the monetary policy stance in Zimbabwe that is largely hinged on controlling money supply growth through excessive ZWL liquidity management, we cite that general disposable incomes in the broader economy are being squeezed owing to liquidity constraints.
The net-effect is that aggregate demand falls, and this constrains GDP growth. Another important fact is that industries in Zimbabwe such as agriculture, mining and manufacturing are capital-hungry and require liquidity to stimulate productivity. Capital is one of the key catalysts for economic growth and development.
There is need to focus on boosting productivity through drivers that lead to economic growth. These include (i) accumulation of capital stock, (ii) labour inputs and (iii) technological advancements. An interesting case study is United Refineries Limited (URL), a producer of cooking oil, personal care products, hygiene and other value added agro-products categories.
The company has made an open call that it needs more of the local dollars to localise production of key raw materials and be able to feed its plant to full capacity. URL’s capacity utilisation remains constrained by a weak domestic raw material base and this has forced the sector to rely heavily on imports.
The sourcing of soya bean and crude oil from outside the country also puts pressure on the limited forex resources while crippling domestic industry viability.
All in all, we maintain that economic risks in Zimbabwe remain elevated and investors on our market should stick to export-oriented stocks and regional plays like Simbisa Brands, Padenga and SeedCo International.
● Matsika is head of research at Morgan & Co, and founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
