It is often said that
knowledge is power, and in vernacular it is often said that “kusaziva
kwakafanana nokufa” or put in Ndebele “ukungazi kufanana lokufa”.
These are the sentiments that are normally put across when one is exposed to
certain knowledge, he /she was not subjected to. It is important for one to be
able to understand what will be communicated to us by our monetary and fiscal
authorities when policy pronouncements are being made which have an impact on
our daily livelihood as a people.
A lot of jargon or complex vocabulary is used when policy pronouncements are made, and what I learned when growing up is that being able to communicate, is the ability to send a message or signal that those who are listening can derive a meaning out of it. Put simply, is the fact that for one to be said to be effectively communicating, the message should be understood by the recipient or receiver of the message. This is the motive of writing this article as a way of trying to explain a few basic banking concepts that are often said when monetary and fiscal authorities speak.
The term Open market operations
simply mean the operations (i.e., selling/buying of government securities)
performed in the open market by the Central bank to expand or contract money in
the banking system and influence interest rates. The expansion of money supply
is often referred to as the expansionary monetary policy by
policymakers and involves the purchases of government securities, such as
Treasury bills, and the Central Bank deposits funds into the bank accounts of
the sellers. The payment becomes part of the reserve balances that commercial
banks hold at the Central Bank; this increases the amount of funds that banks
have available to lend.
On the other hand, we have what is termed the contractionary monetary policy where the Central Bank sells some of the government securities it holds, buyers pay from their bank accounts. This shrinks the funds that banks have available to lend. This creates upward pressure on the Central Banks' funds rate since banks have fewer reserves available to lend and will charge more to lend them.
One would ask the question what is the purpose of the open market operations (OMO)? The purpose of OMO is that it is used as a monetary policy tool to adjust the liquidity condition in the market.
§ If there is excess liquidity in the
market – The Central Bank will sell the government securities, thereby sucking
out the excess liquidity.
§ If the liquidity conditions are
tight (i.e., less liquidity) -The Central Bank will buy the government
securities from the market, thereby releasing liquidity into the market.
The Central Bank on behalf of the
Government can raise money for governance purposes from the market.
One would ask the question, what are these Government securities?
There are several government
securities with different maturity dates, but this article will dwell much on
the ones mostly used by our Central Bank which are:
§ Treasury bills (T-bills) are
short-dated securities used by the government when borrowing from the
market. They are issued by the Reserve
Bank on behalf of the government and their tenor is generally less than a year.
Through investing in Treasury Bills, clients earn fair returns at minimum risk
since the securities are government-backed.
§ Certificates of Deposits (CDs) is a
product offered by banks that provides an interest rate premium in exchange for
the customer agreeing to leave a lump-sum deposit untouched for a period. CDs
have the advantage that their rate is fixed and guaranteed, so there is no risk
that your CD’s return will be reduced or even fluctuate. Examples of a
certificate of deposit are fixed-term placements.
§
Savings
bonds are retail government bonds designed to provide funds for the issuer while also
providing a relatively safe investment for the purchaser to save money. In
2017, the RBZ introduced a savings bond and in the Midterm policy review of
2019, the Central Bank also introduced the US dollar 7% Savings Bond. The
Savings Bond seeks to encourage the public, corporates, churches,
and investors in general, to start saving and to nurture a culture
of saving and building national wealth. The bond has a tenure of 1,2,
3, and 5 years. According to the RBZ, saving bonds provides investors with a
platform to save and invest in high-yielding instruments.
Author: Tillas Gopoza is an Economist. He writes in
his capacity as the Chief Economist for the Bankers Association of Zimbabwe. He
can be contacted at tillas@baz.org.zw