World Bank implores Zimbabwe to maintain tight money supply

The World Bank has urged Zimbabwe to maintain its tight monetary policy stance and resist spending pressures to control inflation and ensure lasting exchange rate stability.

Inflation in Zimbabwe is closely linked to movements in the exchange rate, making currency stability—largely influenced by money supply levels—a crucial factor in maintaining economic equilibrium. According to the World Bank, Zimbabwe experienced a significant surge in money supply at the beginning of 2024, but the introduction of the Zimbabwe Gold (ZiG) currency in April successfully restored price stability.

The country faces a tough balancing act in restraining expenditure due to competing national priorities and limited financial resources. Zimbabwe's economy continues to recover from years of Western sanctions, which restricted access to concessional funding and international credit lines.

Zimbabwe experienced inflationary pressures in the first quarter of 2024, fueled by significant government spending on key infrastructure projects. This raised concerns of a potential relapse into hyperinflation, similar to the 2008 crisis when inflation reached an estimated 500 billion percent, eroding savings and pensions.

However, the government has adopted a new economic trajectory characterized by low inflation and a stable exchange rate. This shift has been welcomed by businesses, which believe that sustained economic stability will promote long-term growth and predictability in financial planning.

Economists have attributed past price instability and exchange rate volatility to quasi-fiscal operations and excessive government spending beyond the national budget. To address this, Finance, Economic Development, and Investment Promotion Minister Professor Mthuli Ncube and Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mushayavanhu have pledged to enforce strict fiscal and monetary policies to sustain stability.

Supporting these policies, the government has introduced measures such as requiring the payment of certain taxes and import duties in the local currency to stimulate demand for ZiG.

"Maintain RBZ's tight monetary policy stance and resist renewed (fiscal) pressures to ensure low inflation and exchange rate stability," the World Bank stated in its latest update on Zimbabwe's economy.

The World Bank's recommendations align with those of the International Monetary Fund (IMF), which recently noted that Zimbabwe's economy is recovering from the effects of the El Niño-induced drought, which slowed growth in 2024. While Zimbabwe's economy grew by only 2 percent last year, it is projected to expand by 6 percent in 2025 following favorable rainfall across the country.

Agriculture remains a critical pillar of Zimbabwe's economy, alongside mining, tourism, and manufacturing. The RBZ has reaffirmed its commitment to policies that promote price, currency, and exchange rate stability, emphasizing the importance of consistency and credibility in monetary policy.

"The new RBZ leadership is focused on maintaining stability, so forget random printing of money; it is now a thing of the past. We will prudently calibrate market liquidity conditions to curb speculative activities," RBZ Deputy Governor Dr Innocent Matshe said during a panel discussion at a CEO Roundtable breakfast meeting last week.

Dr Matshe emphasized that the RBZ will carefully navigate the dual objectives of reducing inflation and fostering robust economic growth, acknowledging the challenge of balancing these goals. The central bank will continue managing market liquidity prudently to prevent speculative activities and sustain a stable economic environment.

In September 2024, the RBZ reinforced its tight monetary policy stance by raising the bank policy rate and statutory reserves to counter inflation and exchange rate risks. This move successfully eased inflationary pressures, with monthly inflation dropping from 37.2 percent in October 2024 to 3.7 percent in December 2024. The decline was primarily attributed to exchange rate stability, reflected in a significant reduction in parallel market premiums.

With these measures in place, Zimbabwe aims to sustain economic stability, bolster investor confidence, and lay the groundwork for long-term growth.