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‘Forex headaches set to persist’



ZIMBABWE’S forex regime will continue to present challenges to monetary policy,, with the central bank expected to cut its benchmark rate to 37.5% by the end of 2022, as inflation decelerates.


For the remainder of 2021, the Reserve Bank is expected to keep its key policy rate on hold at 60% before instituting a series of rate cuts from 2022 onwards, as it seeks to boost access to credit.

In its analysis of the country’s state of the economy, an international research firm, Fitch Solutions, indicated risks arising from the foreign currency regime will persist.

In October, the central bank hiked the rate to 60% from 40%, the first rise since a 500-basis point (bp) increase in February 2021, citing concerns about a rise in month-on-month inflation and renewed instability in the parallel-market exchange rate.

The apex bank also hiked the interest rate on the Medium Term Accommodation Facility (through which banks access interim funds for on-lending to various productive sectors) from 30% to 40%, and increased statutory reserve requirements for demand deposits from 5% to 10%, while maintaining the rate for savings and time deposits at 2.5%.

While annual average inflation is seen remaining elevated in 2021, Fitch forecasts annual average inflation rate of 42.5% in 2022 on the expectation of enhanced exchange rate stability and reduced central bank financing of the fiscal deficit, as well as positive base effects from very high prices in the first half of the year.

Despite recent exchange rate volatility, the authorities have made some progress tackling the pace of currency depreciation, with the official exchange rate weakening by just 7.6% between January and late October 2021 as against a 505.3% depreciation over 2020.

In September, the authorities received a new foreign-reserve allocation worth US$961 million from the International Monetary Fund, boosting import cover from just 0.3 months to 1.9 months.

“We expect annual inflation to average 35.0% in 2022 — down from a forecast 145.3% in 2021 and 557.2% in 2020 — given somewhat reduced central bank financing of the fiscal deficit and more moderate depreciation of the Zimbabwe dollar. We expect the RBZ to cut its benchmark rate to 37.5% by end-2022 as inflation decelerates. We forecast an annual average inflation rate of 42.5% in 2022 on the expectation of increased exchange rate stability and reduced central bank financing of the fiscal deficit, as well as positive base effects from very high prices in H121 (first half of 2021),” Fitch said.

Price increases are also being driven by the depreciation of the Zimbabwe dollar as businesses have been raising prices to hedge against the currency volatility arising from growing money supply, a rise in imports that is driving demand for US dollars, and substantial delays in settlement at the central bank’s weekly currency auction that have forced corporates to source currency on the parallel market.

The parallel market rate has depreciated to ZW$180:US$1 from ZW$129:US$1 in July —more than double the depreciation of the official rate (which currently stands at ZW$105.70:US$1, as against ZW$85.42:US$1 in July).

Given continued price pressures, Fitch expects inflation to average 145.3% across 2021 as a whole, as against 557.2% in 2020.

“Equally, we expect that the RBZ will continue to manage access to the FX auction system (limiting such access to priority sectors, for example). While this will result in a continued spread between the official and parallel market rates, we expect this spread to moderate as increases in mining output and still high global prices for minerals lead to increased US dollar availability. Moreover, we expect the RBZ to continue to seek to contain expansion of the monetary base, the central bank reduced the reserve money growth target from 22.5% to 20% per quarter from June 2021, and to 10% for Q421 (fourth quarter of 2021) and H122 (first half of 2022), although we note that the government will continue to rely on domestic sources to fund the fiscal deficit,” Fitch said. 

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