eBusiness Weekly
The move by the Reserve Bank of Zimbabwe (RBZ) to a “big bang” revolution in foreign exchange next week, buying and selling foreign currency through an auction is going to give importers a number of tricky decisions to make as they switch to the new system.
The interbank market once worked to a degree. The fixing of the exchange rate at US$1:Z$25 at the start of the lockdown rapidly broke what functionality that system had created. No exporter was going to sell anything in retained funds if they could possibly help it, preferring to keep the export earnings locked up in a nostro account if nothing better was on offer and dreading any forced sales as the RBZ was starting to hint was going to be the case.
Any functioning economy needs a way for export earnings to be made available for importers at an agreed price. To have, as we getting in Zimbabwe, a brick wall built between the source of much of the foreign currency and the people who needed to buy it was not the sign of a functioning economy.
The result was predictable. Most businesses, either at first hand if they were not too fussy or at second hand, through a middleman, were getting their foreign currency for imports, or the actual imports themselves, via the black market in free funds and whatever the less observant exporters could divert at black market rates into the economy.
The result has been a burst of inflation that has made all business more and more difficult, the pricing of goods and services at replacement cost using the black market and the growing hoarding of foreign currency, either in nostro accounts or in advance buying from the black market. Each of these processes simply made a bad situation worse.
The feedback loops made the interbank market less and less relevant and caused a spiral in the black market rates as far too much money, with multiple aims from buyers, feeding into a very limited supply.
So the RBZ, to be relevant and do its actual job, has finally bitten the bullet and introduced the long-awaited auction system using the international standard of the Reuters system. But that raises a lot of questions.
The main ones are just how much is on offer at each auction, especially the first, and what rate should a business use when setting a bid. So far the RBZ has not been publicly saying very much at all. But, as all bids have to made through a bank, the authorised dealers, there is a good chance some indication has been made in banking circles as to expectations.
The RBZ, in its public statements, has given some clues. The import priority list is still active and a lot of rules have been put in place to stop people hoarding currency and, presumably, hoarding imports. The need for invoices should put the vast Zimbabwe dollar holdings by some into the freezer, since these holders need to buy something that the RBZ, through their bankers, approves of them buying.
This has been driving the black market into a frenzy since there are some who have high levels of local currency liquidity wishing to buy whatever currency they can get hold of and are not too worried about price. The auction system largely excludes them.
At the same time the enforcement of the 30-day liquidation rule, that is nostro account retained export holdings have to be liquidated within 30 days of receipt, should start supplying the market with currency.
At the same time the there is that interesting item in the list of sources. Besides voluntary or involuntary liquidation of nostro balances within 30 days, there is the “offshore facilities” arranged by the RBZ itself.
But has the RBZ arranged anything for next week? It would make sense to have something to supply the market through the auctions, at least for the first one or first few, while everyone starts to see what prices are on offer.
This is where the sanctions regime makes life so difficult. Normally a country like Zimbabwe undergoing fiscal and monetary reform, and doing this seriously, can gain access to funds from the International Monetary Fund to at least prime the process. That is what the IMF was set up for at the beginning, along with audit functions to ensure the support was being used properly.
But the fiscal reforms now almost two years old, and even with the inflation and the lockdown the Ministry of Finance and Economic Development has been stressing that it will be wise, there is a chance foreign banks will take an interest in Zimbabwe and not treat the Government and the RBZ as a bunch of deadbeats. There is some track record but it is a short track record and is built on almost 40 years of appalling fiscal indiscipline.
The exact timing of moving the time-expired retained export earnings to the market is also a factor. Most exporters must have been extremely worried about the previous announcement that the 30=day rule was now going to be enforced. Selling each hard-earned US dollar at Z$25 could not have been seen as anything but a near disaster.
This is because suppliers and a lot of others were tracking their local currency prices to the black market rate, despite increasingly harder attacks by the RBZ on that whole market, making transactions more and more difficult. Obviously people will continue to get around the RBZ restrictions if they really try, but that will drive up costs.
If, at the same time, the RBZ manages to create a more efficient market at lower costs then more and more people will be willing to participate.
In some ways, when looking at the history of our currency markets, it is a pity that the RBZ did not start off with the auction system and a big-bang on day one. To be fair the monetary authorities probably expected a different outcome from their phased changes, and placed too little stress on the desire by some to make a quick dollar by just breaking a laxly-enforced law.
The division of foreign currency into export earnings and free funds did not help much either, moving the entire diaspora remittances into the free funds market.
But this can all be overcome if the auction system is well-managed, if the RBZ can ensure export earnings are fed into that market and not diverted directly or indirectly into the black market and if the worst excesses of the black market can be controlled at worst or eliminated at best.
The ultimate aim must be to make Zimbabwe “normal”. In a normal country foreign exchange is earned by exporters, with external remittances padding out the total, and is spent by importers. The floating exchange rates, or in the old days the revaluations and devaluations required, ensured that the two were kept in a rough balance. Fiscal authorities under this system cannot print their way out of trouble since costs immediately follow printing and there is no gain.
A lot is riding on the first two auctions, both this month, and it is essential that those who want an ordinary country and ordinary market system to set exchange rates co-operate with the authorities, give their honest feedback and suggest improvements, and with the RBZ listening to that feedback and continuing to be more open to suggestions and proposals. Obviously most market users have their own limited agendas, with the RBZ taking the balanced view. But crating that balanced view means listening to everyone.
There will be some adjustments to be made, for the curious inherited systems to be worked out of the new system, but that should be done quite quickly. Most subsidies are already now in the fiscal system where they belong, not in the monetary world, with petroleum fuels being perhaps the last holdout, and getting fuel at interbank rates is now a subsidy, or at least a potential subsidy paid through quasi-fiscal monetary policies.
Zimbabwe has been splitting the fiscal and monetary worlds, keeping communication between the two while separating responsibilities and duties. The auction system allows that split to become permanent and total.
Otherwise the switch to auctions should not create any major pressures.
Since the black market rates have already been used by most to set pricing the switch to auction rates, which have to be lower when you take into account just what auction-bought currency can be used for, should provide relief for importers and their customers, but with currency earners not being stifled by unfair arbitrary rates and getting fair value for what they sell or are forced to sell.
