Bankers Warn Of Price Hikes And Shortages After Induced ZiG Devaluation
The Bankers Association of Zimbabwe (BAZ) has warned that the recent devaluation of the Zimbabwe Gold (ZiG) by the Reserve Bank of Zimbabwe (RBZ) last week could lead to rising prices and shortages of essential commodities.
On September 27, the RBZ set the official exchange rate at ZiG24.3 per US$1, up from ZiG14.1 per US$1. On October 2, 2024, the official ZiG rate against the US dollar had fallen to ZiG25.2 per US$1.
The warning from BAZ is contained in a leaked internal document that outlined the topics discussed during a meeting between its members and RBZ Governor John Mushayavanhu on Tuesday of this week. Said BAZ:
If market conditions remain unfavourable, such as high inflation, low investor confidence or trade imbalances, the ZiG will depreciate rapidly.
This can lead to higher costs for imports and inflationary pressures on goods priced in foreign currency.
There’s a need to ensure sufficient forex to meet demand. Demand can be limited by minimising creation of local currency.
BAZ said if the exchange rate weakens significantly, it could result in higher prices for imported goods, further driving inflation in an economy that is already grappling with price instability.
The bankers warned that consumers would encounter rising costs for essential items such as fuel, food, and other goods priced in foreign currency. Added BAZ:
Foreign investors may view a more flexible exchange rate regime as a positive sign, as it reduces the risk of sudden devaluations and allows them to assess currency risk more accurately.
However, short-term volatility may still make investors cautious. History does not work in our favour as the market holds inhibition around the local currency as long as the confidence levels remain low.
BAZ also warned that limiting the amount of money individuals can take out of the country could disrupt the informal import trade and lead to job losses within the informal sector. It said:
[We saw the] reduction of the foreign currency an individual can take out from the country from US$10 000 to US$2 000. [Thus the] reduction in externalisation of funds. [This will see the] disruption to informal import trade, with more transactions taking place underground.
BAZ said job losses or decreased incomes for individuals in informal retail, transportation, and related sectors could occur, exacerbating economic difficulties, especially in a country where formal employment opportunities are limited.
The bankers also stated that the increase in the policy rate from 25% to 35% would affect borrowing costs and lead to higher prices, contributing to inflation. BAZ said:
On the increase in policy rate from 25% to 35%, effective immediately, the implications are higher borrowing costs.
This may deter investment and expansion, as accessing capital becomes more expensive, potential to see an increase in NPL [non-performing loans, likely increase in prices and subsequently inflation, market likely to shun the local currency.
BAZ said the 30% increase in statutory reserve requirements could lead to banks struggling to meet these obligations due to liquidity constraints, as their funds will be tied up in Treasury Bills, loans, coins, and other investments.
In response to BAZ, Mushayavanhu said the increase in the bank policy rate is a common policy measure to curtail market liquidity and control inflation.
Mushayavanhu defended the increase in statutory reserves to 30% saying it is intended to further tighten monetary conditions and support the stabilisation efforts.
The RBZ said banks unable to meet the new statutory reserve requirements can seek accommodation from the RBZ as the lender of last resort (unsecured) at 40% ZWG and 15% USD.
The central bank also rejected the proposal by BAZ to stagger statutory reserve payments.
The RBZ said the exchange rate will firm up once the policies of increasing the policy rate and statutory reserves are implemented.
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