Golden Sibanda
THE Confederation of Zimbabwe Industries (CZI) is confident the country can sustain the prevailing exchange rate and inflation stability provided the authorities maintain a tight grip on liquidity growth.
Both the Reserve Bank of Zimbabwe and Treasury have already expressed their desire to maintain tight fiscal and monetary policies to anchor exchange rate and inflation stability going forward.
This comes after the central bank introduced a precious minerals- and foreign currency-backed new currency, Zimbabwe Gold (ZiG), in April last year to engender macro-economic stability, which is largely a function of stable exchange rate and inflation.
In the 2025 National Budget Statement, Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube said prices for goods and services remained relatively stable following the introduction of ZiG.
He said month-on-month ZiG inflation declined by minus 2,4 percent in May 2024, and averaged zero percent in the second quarter of the year.
The Treasury chief, however, noted that inflation pressures re-emerged in August 2024 to October 2024, attributable to a surge in parallel market foreign exchange activities, which worsened adverse inflation expectations.
The inflationary pressures, he said, have since been contained.
Zimbabwe’s December inflation fell within the 5 percent target set by the central bank and the International Monetary Fund’s projection of 7 percent, signalling significant progress towards the authorities’ objective of durable price stability.
The December inflation data, as reported by the Zimbabwe National Statistics Agency, paints a favourable picture when analysed across the ZiG, US dollar and weighted metrics.
According to CZI, the ZiG inflation surge in September and October last year, confirmed that inflation in Zimbabwe is exchange rate-driven.
In its latest inflation and currency update, CZI said the outlook for inflation in Zimbabwe generally hinged on the ability by the authorities to stabilise the exchange rate.
It also noted that a narrow exchange rate premium reduced the benefits of arbitrage, discouraging currency conversions before payments and allowing businesses such as supermarkets to realise both ZiG and US dollar sales.
The industrial lobby group also said exchange rate stability resulted in US dollar price stability, which, in Zimbabwe, tends to respond to local currency movements to avoid official exchange rate pricing mismatches that may attract penalties from regulators.
“While a market-determined exchange rate might not necessarily stabilise the exchange rate if liquidity is not properly managed, it ensures that there are no sudden shocks to inflation in future.
“Thus, the inflation outlook in Zimbabwe largely depends on how ZiG liquidity would be managed, as well as whether the exchange rate is market-determined.
“Measures that create demand for the local currency, such as having taxes payable in local currency, would help cement inflation stability,” the industrial lobby group said.
CZI said since the introduction of ZiG in April 2024 up to September 26, 2024, the official rate depreciated by only 3 percent. However, when the central bank adjusted the official exchange rate, the parallel market rate increased.
The devaluation of the official exchange rate did not result in convergence with the parallel market buying rate. The parallel market rate also depreciated by 24 percent on the same day.
Due to limited supply of ZiG in the market, the depreciation in the parallel market was not sustained. The local currency started appreciating on the parallel market from September 30, 2024.
“This resulted in a decline in the exchange rate premium to a low level of 27 percent on the buying rate by mid-October,” CZI noted.
However, since mid-October, CZI said, the upward pressure on the buying rate at the parallel market began to resurface, which pushed the premium to about 46 percent on October 31, 2024.
“The sources of liquidity that drove the parallel exchange rate towards the end of October need to be addressed, as the trend in the parallel market had demonstrated that the parallel market rate can indeed appreciate under tight liquidity.”
Minister Ncube said the central bank’s Monetary Policy Committee (MPC) responded to the inflationary pressure through stabilisation measures that included increasing the bank policy rate and standardising statutory reserve requirements for deposits.
“The MPC also allowed greater exchange rate flexibility and reduced the limit on foreign exchange individuals can take out of the country,” he said.
Since the introduction of ZiG, the official exchange rate remained largely unchanged between US$1:ZiG13.5 and US$1:ZiG14 from April to September last year.
This stability led to subdued inflationary pressures, as inflation expectations firmly anchored.
However, following the monetary policy changes announced on September 27, 2024, Minister Ncube said, the official exchange rate depreciated significantly to US$1:ZiG24,88.
Similarly, the black market exchange rate also registered a depreciation, to a high of US$1:ZiG40 during the same period, before declining to around US$1:ZiG35 as at October 4, 2024.
In the outlook period, the Treasury expects the exchange rate to remain stable following the MPC pronouncements of September 27, 2024, which have already addressed most of the emerging exchange rate pressures.
The MPC increased the bank policy rate from 20 percent to 35 percent on September 27, 2024 to help anchor inflation expectations and reduce inflationary pressures.
Generally, the bank policy rate indicates the central bank preferred the minimum lending rates commercial banks must charge to achieve the targeted macroeconomic trajectory.
The RBZ’s MPC also increased statutory reserve requirements for demand and call deposits to 30 percent and raised statutory reserve requirements for savings and time deposits to 15 percent.
The measures form part of the bank’s tight monetary policy stance to control liquidity growth, which, in the past, has upset the exchange rate and driven inflation up.
To consolidate exchange rate stability, the monetary authorities will entrench efficiency of the willing buyer, willing seller foreign exchange rate system, to enhance price discovery and use their monetary tools to anchor price stability.
On its part, the Treasury has pledged to contain the National Budget deficit below 1 percent and to manage liquidity more judiciously to guarantee macroeconomic stability.
Further, several taxes, import duties, tariffs and statutory payments will have to be paid in the local currency, as part of measures to promote and expand use cases of the domestic currency.