While it’s only human to give credit where credit is due, it is in the nature of many analysts to anticipate what could go wrong with any major policy pronouncement(s). They normally choose to play the devil’s advocate because, quite often, when tested against the hard surface of reality, policies do not work out as anticipated. This could be because, all too often, the policy makers are out of touch with reality or do not live up to the best of their intentions.Or they just choose to ignore the structural and institutional barriers that stand in the way of success of any policy measure.
Being a banker myself, I know policy makers may not be very close to the market, and as recently admitted by the Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya, may be slow to respond to market dictates.Now, what’s comforting is that the RBZ has finally responded to the increasing market call to institute market-based currency reforms by establishing the interbank foreign currency market in the recently announced 2019 Monetary Policy Statement (MPS).Without doubt, this system will go a long way in addressing the currency distortions as well as ensuring economic stability.With the previous exchange rate system, the market had to depend on the RBZ for lawful access to convertible currency (ies) for external payments.
That system negates business efficiency, with generators of foreign currency having to unsustainably subsidise the import of the so-called essentials, which were given preferential access to foreign currency.The obvious attendant risk of this system was the growth of the gray market for currencies, which prices for risk.
By allowing market forces to determine the currency exchange rate on a willing-buyer, willing-seller basis, it is hoped that the new system will result in significantly improved allocative, distributive as well as productive “economy-wide” efficiency.The operation of an efficient interbank market shall see the scarce convertible currency being redirected into the less risk and more transparent formal system.This is necessary to preserve the value of the newly introduced RTGS Dollar (RTGS$).Value preservation is the key concern of the ordinary person in Zimbabwe today as memories of loss of wealth suffered during the hyperinflation period of 2008 are still fresh in their minds.There might be need for the central bank to explain how pension values have been insulated against potential loss of value in order to foster confidence in the market.
The central bank announced recently that it has been assisting pension companies to buy deposit certificates in order to ringfence pensions.A repeat of the erosion in pension values — especially at a time when the ink on the report of the commission of inquiry into the conversion of insurance and pension values from the Zimbabwe dollar to United States dollar of March 2017 has not even dried — would be unsavoury.It is, therefore, my considered opinion, suggestion and strong recommendation that the RBZ should put adequate measures to address and restore the value of savings, mainly pensions, as well as come up with an acceptable way of dealing with legacy liabilities or debts denominated in convertible currencies.This is necessary to prevent further loss of confidence and trust in both the country’s financial system and the RBZ itself.It’s always important for RBZ to remember that “currency is confidence” and “confidence is currency”.That’s why, despite reports of more than $600 million worth of foreign currency against RTGS$1,8 billion in circulation, the interbank market has largely remained a sellers’ market.After exhausting the seed foreign currency provided by RBZ, the interbank market has significantly slowed as generators of foreign currency are holding on to their money.
Its common cause that before the new policy measure, the market had since established acceptable structures for trading currencies, so it may take a lot of convincing to attract these players in the interbank foreign-exchange market.
The Reserve Bank of Zimbabwe and banks were even encouraging these structured transactions such as matching, where importers and exporters would trade foreign currency on agreed terms.The insistence of the exchange rate parity (1:1) has also seen an increased tendency foreign-currency earners to secure their foreign currency by paying their suppliers in hard currency as a way of maximising the value of their hard currency and achieving operational efficiency.Because the RBZ retention scheme has remained largely unchanged, except for tobacco and cotton — which are now retaining 80 and 30 percent respectively (from the previous levels of 20 percent) — we do not expect a significant change from current retention levels of around $4 billion per annum.Worse still, the removal of the export retention portion that was going to banks (“Authorised Dealers”) has meant that the interbank market has to depend solely on retentions from foreign-currency generators.
Previously, banks could use their foreign currency retention proceeds to complement the RBZ allocations, and it’s my considered view that we should reintroduce Authorised Dealer retentions.Supported by the gradual increase in foreign currency retentions from the liberalisation of imports such as fuel, we shall see a significant improvement in inflows of convertible currencies into the interbank foreign-currency market. The recent move by Zimbabwe Energy and Regulatory Authority (Zera) to liberalise fuel imports could be seen as supporting the proposed reduction in the foreign currency surrender requirements, noting that fuel is the single-largest consumer of the country’s forex.As a measure to buttress the supply of foreign currency, there is need to respond to the market’s call to revise the foreign currency retention window of 30 days to allow foreign-currency earners the time and latitude to use their foreign currency.
This is in view of the effectiveness of incentives rather than reliance on controls as a measure to support the efficacy of a policy measure.
Importantly, RBZ should also consider deserving cases for extension of the retention window to minimise losses arising from liquidation of retention proceeds, particularly for companies that might need to use the funds in a period falling outside the 30-day window
All these recommendations are aimed at encouraging the flow of foreign currency into the interbank market rather than the current scenario where the generators of this money have been holding on to it.However, due to low confidence levels, moral suasion — based on the understanding of suppliers of foreign currency’s cashflows and foreign currency requirements — may be necessary to encourage major foreign-currency earners to release their retentions to the market.
The basis for moral suasion is that the success of the interbank foreign exchange market is likely to result in the reduction of prices to their pre-October 2018 levels, which is for the greater good of the economy.Going forward, fiscal discipline is going to be more important to contain inflation for preservation of value of the RTGS$.
This should be supported by the removal of the interest-rate cap to discourage consumptive borrowing and the concomitant pressure for foreign currency.
Whilst the requirement to allocate 70 percent of the foreign currency in the interbank market to the productive sector is plausible, there is need for a mechanism to prioritise high-impact areas in line with the current pursuit of import substitution, as well as export growth models.
Increased flow of foreign currency towards resuscitation of agriculture, mainly the production of soya beans and wheat, whose import bill continues to chew up significant amounts of foreign currency, would easily achieve this.
Persistence Gwanyanya is banker, financial and economic analyst who founded Percycon Advisory Services. For feedback. E-mail: email@example.com; cell: +263 773 030 691.