The Reserve Bank of Zimbabwe (RBZ)’s decision to trade non-negotiable certificates of deposits in exchange for excess liquidity held by local financial institutions is in line with authorities’ contractionary monetary policy approach.
And one of the key targets of the tight monetary policy approach is to keep a rein on inflationary pressures.
Economist and Monetary Policy Committee (MPC) member Persistence Gwanyanya, said the move is part of the central bank’s wider market sterilisation efforts.
“This conservative approach is required to put inflation and currency volatility under leash. Its important to point out that the instrument affects Zimbabwe dollar (ZWL) liquidity only,” he said.
“We were relying on savings bonds to mop up liquidity in the market and non-negotiable certificates of deposits will complement them.”
With the tobacco and cotton marketing seasons in full swing, respectively, these act as sources of new ZWL liquidity, which puts pressure on scarce foreign currency thereby driving up inflationary pressures.
Official figures show that the country’s daily tobacco sales volumes have been significantly improved from last year, with a total of 135,4 million kilogrammes valued at US$366,5 million had been traded as at June 3, 2021.
In terms of the latter crop, the 2021 Cotton Marketing Season commenced on May 18, with a producer price of $85 per kg for seed cotton delivered to the Cotton Company of Zimbabwe (Cottco).
“It appears there are more sources of ZWL liquidity in the market from tobacco sales, payments for cotton arrears etcetera and hence the need to increase RBZ’s mop up activities.
“This is necessary to deal with the effect of increase in ZWL liquidity on demand for foreign currency. Because banks are currently derisking, excessive liquidity may result in speculative and rent-seeking activities,” said Gwanyanya.
“This is why the non-negotiable certificates of deposits is a necessary instrument at the moment. The loan-to-deposit ratio has remained low, below 50 percent; perhaps banks should increase their appetite to lend for productive purposes.”
The continued stability of the local unit points to success of initiatives by both fiscal and monetary authorities.
The Zimbabwe dollar eased by a marginal 0,36 percent to $85,07 against the United States dollar from $84,76 last week after the latest central bank foreign currency auction.
The RBZ is the sole supplier of the hard currency on the auction platform.