Monetary Policy To Remain Challenging in Zimbabwe: Analyst

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An economic analyst says Zimbabwe’s monetary policy will remain testing in 2021 given the limited foreign currency reserves and weak economic prospects.

Fitch Solutions also expects the Reserve Bank of Zimbabwe (RBZ) to have only limited capacity to shore up the currency by purchasing Zimbabwean dollars on the foreign exchange market.

The analyst says,” Macroeconomic fragility means that monetary policymaking in Zimbabwe will remain challenging over the coming quarters.”

“While the authorities have progressively lifted Covid-19 containment measures, sectors including tourism, non-food manufacturing, mining, financial services, transport and agriculture have been seriously affected by the pandemic, while the IMF estimates that about 7.7mn people (approximately half of the population) need food assistance, and at least 1.7mn require additional social protection.”

Fitch Solutions forecasts the real GDP to contract by 12.9% in 2020 and to by just 2021, further complicating the monetary policy.

“We expect average annual inflation to slow further to 136.5% in 2021. This slowdown will reflect a number of factors, including base effects from very high inflation in 2020,” the analyst says.

“… we expect the parallel market to continue to trade at a considerable discount to the official rate given continued constraints such as low foreign exchange reserves and thus low levels of liquidity in the system, which will make the exchange rate auction system difficult to operate, and continued prioritisation of foreign exchange allocations by the central bank.”

“While the RBZ dictates that companies must display prices in local and foreign currency terms at the prevailing market rate, the likely inability of SMEs to access foreign currency at this rate means that a de facto parallel rate will persist,” the analyst goes on.

Fears have been that Zimbabwe’s latest lockdown will further shackle economic growth.

“The RBZ’s scope to raise interest rates more aggressively to have a greater chance of preventing further FX weakness will be limited, given that such a move would act as a further constraint on already weak growth,” Fitch Solutions says.

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