ECONOMIC analysts say the tight monetary policy stance taken by the central bank in the first half of this year to stabilise the local currency has accelerated dollarisation.
Authorities maintained a tight monetary policy in the first half of the year, instituting a number of liquidity management policies. These included liberalisation of the exchange rate, tighter monetary policy, and the introduction of gold-backed digital tokens.
According to the Reserve Bank of Zimbabwe (RBZ)'s mid-term monetary policy statement (MPS) released last week, total deposits increased from $2,29 trillion as at December 31, 2022 to $14,66 trillion as at June 30, 2023.
The increase was mainly driven by growth in foreign currency deposits, it noted. Commercial banking sub-sector deposits constituted 87,75% of total banking sector deposits.
Foreign currency deposits accounted for 88% of total deposits as at June 30, 2023.
“Decline in the proportion of Zimbabwe dollar deposits by nearly 50% to 20% of banking deposits, while the United States dollar deposits have increased to 80%, is testament to a self-dollarising economy which should negate the need for liquidity mop up strategies,” economic analyst Chenayimoyo Mutambasere told NewsDay Business.
“This alludes to querying of excess liquidity mop-up strategy that have seen the country’s gold sold at concessionary rates.”
Money stock at year end composed of 43,04% local currency transferable deposits and 56,88% foreign currency account deposits.
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“As of June 2023, foreign currency deposits constituted 81,51% of the total money supply while local currency deposits accounted for 18, 43%, and cash in circulation was 0, 06% pointing to accelerated dollarisation,” researchers at Inter Horizon Securities said in their analysis of the MPS.
In the period under review, broad money grew to $14,3 trillion, compared to $2,3 trillion recorded in December 2022 on account of the impact of exchange rate movement on foreign currency accounts.
Reserve money grew 923,52% to $1,06 trillion, with 764,09% of the change attributable to valuation.
Foreign currency-denominated reserves grew 138% in the reviewed period to US$157,25 million, accounting for 81,87% of reserve money, while local currency reserves of $182,61 billion constituted 17,15% of reserves.
FBC Securities said there was a strong correlation between money supply, exchange rate and inflation as evidenced by spikes in both exchange rate and inflation which coincided with increased liquidity locally.
“We believe maintaining a suitably tight monetary policy in the short to medium term will be key to ensuring sustained, long-term macroeconomic stability,” the research firm said.
“While liquidity management efforts have been key to restoring relative stability to the local economy, money supply constraints have restricted the local stock market’s performance.”
Year-to-date market performance has been largely subdued, generally being outpaced by inflation and exchange rate movements.
“We anticipate market performance to remain under pressure in the short to medium term as a result of the tight liquidity environment,” FBC Securities said.
Meanwhile, Mutambasere noted that inflation continues to be in the three-digit territory and likely to increase by September when economic activity increases after the winter season and back to school, dampening hope of economic growth.
