THE current Zimbabwe dollar liquidity squeeze will continue for a while longer as authorities strive to further stabilise the local currency and inflation, the Reserve Bank of Zimbabwe (RBZ) has confirmed.
RBZ governor John Mangudya told The Financial Gazette — the country’s number one business publication — yesterday that the liquidity squeeze was one of the anchor measures that had been put in place by authorities to stabilise the economy.
At the same time, hard-pressed captains of industry and commerce continue to stand behind the RBZ’s measures, describing the current tight money supply situation this week as “a challenging but necessary evil to establish stability”.
Reserve Bank of Zimbabwe governor, John Mangudya
The dogged Mangudya said the “nascent stability”, which had been observed in the market over the past two weeks was “expected to continue in the short to medium-term”.
“The Bank is, therefore, expecting feedback from business and the general public in order to fine-tune its monetary policy, with a view to sustaining the current promising stability on the exchange rate and inflation front,” he added.
This comes as the hirtheto hapless Zimbabwe dollar continues to firm up against the greenback on both the official and parallel markets as a result of the local currency liquidity squeeze.
The Zim dollar strengthened to below the $5 000 mark against the greenback on Tuesday, down from the $5 251 that was recorded at last week’s wholesale foreign exchange auction rate.
And as was the case with the three previous wholesale auctions, the country’s commercial banks did not have enough uncommitted local currency this week to buy all the US dollars that the ministry of Finance made available for the auction run by the central bank.
Speaking to The Financial Gazette this week, the chief executive of the Zimbabwe National Chamber of Commerce (ZNCC), Chris Mugaga, said the prevailing Zim dollar squeeze was “a necessary evil to establish stability”.
However, he also described it as a case of “robbing Peter to pay Paul” as the crunch was negatively affecting other sectors of the economy.
“The temporary liquidity squeeze that we are seeing in the market has really helped to stabilise the market. It has stabilised exchange rates and inflation in the short term.
Christopher Mugaga, the ZNCC chief executive officer.
“Yes, for some of our members there has been an issue with cash flows, taxes and other payments that have to be paid in local currency, but most of them have complied.
“However, the other issue that we are seeing is that although the crunch has re-asserted stability, it has had a negative impact on government contractors.
“Some of these contractors have not got their payments and this has negatively affected their operations,” Mugaga said.
He added that business expected the liquidity crunch to be buttressed by appropriate policy measures to foster sustainable money supply discipline by authorities.
“This is because the liquidity crunch on its own is not sustainable on a medium to long-term basis. We would want to believe that this is the start of macro-economic fundamentals corrective processes by the authorities to ride on the current stability that is obtaining in the market,” Mugaga said further.
Reached for a comment, the president of one of the country’s biggest business groupings, the Confederation of Zimbabwe Industries (CZI) — Kurai Matsheza — said industry was “feeling the pinch” of the liquidity crunch.
“The crunch is affecting aggregate demand and order sizes. Most of our members are feeling the pinch.
“We are not so sure how long this will continue, but we will have to confront authorities about that at the opportune time.
“This is because for now, we are of the view that it has helped to stabilise the market and tame inflation. But we are not convinced that it will be sustainable to maintain this squeeze,” Matsheza said.
Kurai Matsheza, CZI president
On his part, economist and former RBZ monetary policy committee member, Eddie Cross, also said the latest measures by authorities to curtail money supply growth were working as intended and helping to stabilise the market.
“The main issue is to stop the Reserve Bank from printing money electronically and I think this has been achieved. The fact that it has led to the tightening of the market, I don’t think it’s really significant.
“If we only print sufficient RTGS to meet the growth in the economy, around about six to eight percent per annum, then I don’t see this being inflationary, but it will suffice to keep the RTGS in circulation in adequate quantities,” he said.
Cross added that the current shortfall of RTGS on the market was forcing firms to liquidate their hard currency stocks, and this was helping to stabilise the exchange rate.
“I think that if we maintain the status quo the exchange rate will continue to strengthen, and we will see the price of goods and commodities come down significantly, and that is good for everybody.
“What we have got to avoid also is the exchange rate becoming too strong,” he noted further.
Economic analyst Victor Bhoroma also said although the liquidity crunch had had a negative impact on some firms, the measures had helped to tame inflation and exchange control volatility.
“To some extent, it has affected many businesses where local currency is needed for the payroll, rates, taxes, levies and other operational expenditures.
“However, businesses have an option of buying the local currency at the prevailing market rates, in similar ways to how they price their products or source foreign currency.
Mthuli Ncube, Finance Minister
“In the meantime, businesses have to accept the reality and buy local currency, or pay in US dollars for their operational expenses,” Bhoroma said.
All this comes after the recent cocktail of policy announcements by Finance minister, Mthuli Ncube — who has targeted money supply growth as a key issue and directed government ministries and State-owned enterprises to charge for their services in Zim dollars.
This was in a bid to inspire confidence and to restore trust in the Zimbabwe dollar, and thus engender wider use of the local currency.
According to data collected by the statistics agency, ZimStat, the use of US dollars in local transactions far exceeds the use of the Zim unit.
Among the new measures that have been introduced by Ncube include Treasury funding the Zimbabwe dollar component of the 25 percent foreign currency surrendered by exporters.
The forex collected from the 25 percent that is surrendered will be collected by Treasury to service foreign currency loans assumed from the central bank.
Ncube also introduced a one percent tax on all foreign payments, and also cut local interbank forex transactions Intermediary Money Transfer Tax (IMTT), and Point of Sale IMTT to one percent.
To encourage the broader use of the local currency, Ncube said Zesa payments, levies, and fees to government agencies and parastatals would be paid mostly in Zim dollars.