Looking at 2021 and taking the RBZ Monthly Economic Review, broad money M3 rose by 132% over the year whilst the parallel rate of exchange fell from $115 to $200, a 74% devaluation but as we know GDP also rose sharply in 2021. To date we only have statistics for broad money to the end of February this year which highlights a 6.5% growth in broad money since the end of December 2021.
The currency devalued by around 10% over that period so nothing dramatic. The ZSE by contrast rose by 36% over that period but reflecting good corporate numbers and then it gained just 5% in March. The parallel rate fell by around 10% in March so again, nothing exceptional. Then suddenly in April the ZSE gains a whopping 78% and the currency devalues by around 60%.
A monetarist would suggest that in March or April, the money taps must have opened to finance such inflation. We won’t know for sure until the numbers can be scrutinised, if indeed that will be possible. If we look back at events in March and April, there were by-elections to finance, the 2022 Census was underway whilst the end of the rains prompted road rehabilitation works.
All three of these were expensive projects. Add to this the preparations for the purchase of the maize harvest and winter wheat planting. It could well be that Government did not have the funds available to fund such expenditure bearing in mind the TB issue at the end of March was heavily undersubscribed at a rate of just 24%.
As a result it is possible that the RBZ lent those funds to Government through a short term overdraft in March and April. This is money creation. These funds were then banked by the private sector and with deposit rates of 25% at best with inflation of 96%, it would have made sense to buy an asset instead of leaving the money in the bank, the most liquid being the ZSE hence its rise.
The currency more than likely devalued by a similar factor to the increase in the money supply, although panic may have driven that higher. Put another way there were more Zimbabwe dollars relative to the USD than before hence its price fell. There is also talk, as yet unsubstantiated, that exporters were receiving more Zimbabwe dollars for their export retentions as the rate used in that calculation had moved from the auction rate to the “Tolerance” rate, now the new interbank rate. That would have required more Zimbabwe dollars which the exporters would have needed to find a home for.
Had interest rates on Zimbabwe dollar monetary assets been attractive enough, recipients of those extra Zimbabwe dollars could have deposited the money in the banks or bought government Treasury bills. This could have mopped up surplus Zimbabwe dollar liquidity which instead immediately went into equities or other hard assets. If deposit rates or yields on Treasury bills were nearer 125% as compared with the current 25% – a premium over the current 96% inflation rate – then at least there would be another liquid Zimbabwe dollar asset class available to consider.
The government reacted to the currency and ZSE gains by introducing a “super-tanker” of measures to try to stop what they deemed speculation. The ZSE was partly blamed but as we have written before (July 2020), the ZSE is a cash settlement market, there is no credit. So a buyer has to have had the Zimbabwe dollars available to purchase shares in the first place. That Zimbabwe dollar was surplus to the buyer’s needs and hence financed the rise in share prices.
Continued next page
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