How we are defending ZiG

22 Sep, 2024 - 00:09 0 Views
How we are defending ZiG Depreciation of ZiG has been compounded by perceived negative sentiments on its sustainability, as opposed to real monetary and financial dynamics

Dr John Mushayavanhu

THE recent depreciation of ZiG in the alternative market is a result of transitory foreign currency demand pressures in the economy in preparation for the next cropping season.

The depreciation has, however, been compounded by perceived negative sentiments on the sustainability of ZiG, as opposed to real monetary and financial dynamics.

Ironically, the high foreign currency market demand and pressures on the parallel exchange rate are occurring at a time when the country has been recording historical levels of foreign currency receipts, which clearly shows that the pressures are a result of adverse expectations in the forex market.

For instance, foreign currency receipts increased by 13,4 percent from January to August 2024, compared to the same period in 2023.

This shows that the depreciation is mainly a result of speculative factors and not economic fundamentals.

The measures being taken by Government to strengthen demand for ZiG through the payment of taxes at the QPDs (quarterly payment dates) and interventions by the Reserve Bank to smoothen foreign currency supply-demand mismatches should result in exchange rate stability going forward.

Alternative market

Due to the speculative tendencies by economic agents, the parallel market has somehow been found to be an alternative market for accessing foreign currency, hence resulting in the emergence of exchange rate pressures.

The Reserve Bank is aware of the behavioural implications of the economic agents and is accordingly implementing measures to address the emerging challenges.

As already communicated, the Reserve Bank injected US$50 million to clear the pipeline demand for foreign currency at banks in July 2024 and a further US$64 million on September 19, 2024 to deal with demand and supply mismatches in the forex interbank market to quell exchange rate pressures.

Tight monetary policy

The Reserve Bank is committed to maintaining a tight monetary policy stance typified by the sustenance of positive real interest rates to engender durable inflation and exchange rate stability.

This stance broadly aligns with the broader economic policy objectives of achieving and maintaining low and stable inflation critical for fostering economic growth.

To achieve this broad objective, the following measures are being implemented by the Reserve Bank:

  1. Liquefying the foreign exchange market through weekly sales of foreign currency to banks from the portion of the 25 percent foreign currency surrender receipts from exports.

Precisely, the Reserve Bank facilitates the trading of about US$12 million through banks on a weekly basis.

  1. Regularly intervening in the foreign exchange market in the event of transitory mismatches in foreign currency supply and demand to clear any accumulated pipeline foreign currency demand as alluded to earlier.
  2. Conducting open market operations to manage liquidity and to influence short-term interest rates towards the desired interest rate corridor as part of the Reserve Bank’s ongoing liquidity management framework.
  3. Using moral suasion through regular engagements with stakeholders to identify challenging areas and proffering common solutions on the way forward.

Reserves

The total foreign reserves, including gold, are around US$375 million, which represents more than three times the reserve money cover.

This is a significant increase from reserve asset holdings of US$285 million when ZiG was announced on April 5, 2024.

Under a structured currency arrangement, the entire stock of the monetary base must be fully covered by reserves, implying 100 percent coverage at a minimum.

With a more than 300 percent coverage ratio, the Reserve Bank is currently providing a more than adequate ZiG cover.

More importantly, the Reserve Bank is committed to maintaining a more than 100 percent monetary base reserve cover to ensure adequate scope for shock absorption.

Deploying reserves for stability

The Reserve Bank may consider deploying reserves to stabilise the currency in the event of severe market disruptions that threaten economic stability.

The interventions are also aimed at smoothening transitory foreign currency supply and demand mismatches caused by timing differences in the realisation of foreign exchange inflows and outflows.

The bank may also intervene as part of its broader foreign exchange management strategy to support the desired monetary policy stance or to counteract speculative attacks on the currency.

Overall, the intervention strategy of the Reserve Bank is guided by an assessment of the economic landscape and the potential impacts on overall monetary policy.

Dr John Mushayavanhu is Governor of the Reserve Bank of Zimbabwe. He was responding to questions from The Sunday Mail’s Emmanuel Kafe.

 

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