eBusiness Weekly
Misheck Ugaro
The Currency Stabilisation Taskforce (CST) that was announced in a press statement by the Minister of Finance and Economic Development in his press statement of March 11, 2020 signalled a move towards the foreign exchange market liberalisation as had been anticipated by many economic players.
Among the notable positives arising out of the setting up of the task force included the tacit acknowledgement of the duo currency route, the authorities acknowledgement that the local currency (ZW$) needed the Government to underpin its use through implementing payment of taxes, duties, fees and other Government charges in local currency and the removal of Bereaux De Change limits.
Further the authorities were implementing the Reuters system as a step towards achieving transparency and a complete liberalisation of the foreign exchange market as it would harmonise all trades. It is widely acknowledged that the local currency still requires productivity and export growth in order to gain competitiveness and boost market confidence.
The measures above, however, fell short of a complete dualisation of the country’s currency regime.
The onset of the Covid-19 pandemic and the need for authorities to respond positively with mitigating measures forced a quicker implementation of the duo currency regime.
As had been alluded to by observers that a significant portion of transactions, in particular in the informal sector, were being carried out using the United States dollar (US$) which was in the hands of the public and not banked, the authorities found it necessary to adopt measures that would assist in mopping up these funds.
In the Statutory Instrument 85 of 2020, the Central Bank announced what looks like a reinforcement of the earlier statement by the Minister of Finance.
This latter directive, whose objective is stated as making it easy for the transacting public to conduct business during the difficult time, specifically the lock down period, provided an option to pay using free funds for goods and services charged in local currency.
The intervention alludes to the country’s limited access to foreign finance that is adversely impacting the balance of payment position.
The principle is for banks to provide digital financial services to customers, in particular gold producers, tobacco and cotton producers as well as recipients of diaspora remittances.
This is provided as a means to promote social distancing in response to the Covid-19 pandemic. One would therefore understand that this is a temporary measure although no time frames are provided as to when this will be reviewed and it is also not possible for anyone to know when the pandemic will be defeated.
One can therefore conclude that this measure is here for the long haul.
The implication of the above measure is that the authorities have permitted the public to transact in a currency of choice between the ZW$ and the US$.
As a direct off-shoot of this policy stance, the authorities immediately suspended the managed floating exchange rate that had been recently launched at the announcement of the currency stabilisation task force by the treasury authorities.
In its statement, the Central Bank advises that this measure is to provide greater pricing certainty for goods and services by fixing the exchange rate at US$1:ZW$25 on the interbank foreign exchange market.
There are several connotations of this directive.
On one hand, the approval for the public to transact in either local currency or foreign currency confirms the dual currency position of the economy.
It therefore removes the uncertainty on the question of legal tender for local transactions.
It may also provide an incentive for the unbanked funds in people’s hands to find the way into the banks given that the idea of the transactions is the utilisation of digital payment systems and therefore may achieve the intended purpose for the authorities to mop the free funds in people’s hands.
Further, it may actually succeed in dampening transactions on the parallel market and may in fact lower the premium between the two markets.
On the face of it this appears supportive of the currency stabilisation task force objective.
However, on the other hand, a further in-depth analysis of the statement reveals some possible conflicting outcomes between the intentions of the Treasury and Monetary authorities.
In many ways this statement may look as a reversal of the recently introduced measures by the treasury that were aimed at liberalisation of the foreign exchange market.
The removal of the managed floating exchange rate, which had been instituted as a step towards full liberalisation, and replacing it with a fixed exchange rate is difficult to comprehend. It is similar to the original problematic US$/bond parity position of US$1:1 bond that was eventually removed in 2019 after it failed to hold.
The only difference is that the new rate is pegged at a higher level of $25.
This rate seems to be an arbitrary peg which has no basis especially given the level of the parallel market rate of $43:US$1 at the point in time. It is not clear how the monetary authorities arrived at the pegged exchange rate which is higher than the managed rate of $18.30: US$1 at the same point in time. It is difficult to comprehend why the managed and the pegged rates are different. The authorities could assist with more details. More so, at the time of instituting the currency stabilisation task force, the treasury had announced the introduction of the Reuters trading system in the banks as a way of promoting transparency in the market.
However, the introduction of a fixed exchange rate means the adoption of the new system is no longer necessary.
It is acknowledged that the monetary authorities allude to the fact that these measures are only for the difficult time of the Covid-19 pandemic (and one can therefore assume the lock down period), the statement does not give time frames of when the system will be allowed to return to the path that had been initiated of gradually moving onto complete liberalisation or the necessary conditions thereto.
Our conclusion is that the authorities have now granted the market the freedom to transact in either of the two currencies. They have officially dualised the currency regime to the US$ and the ZW$.
While it is said these transactions are supposed to utilise free funds and will mainly be on the digital platforms, the reality that will obtain on the ground is that cash transactions will in fact be more than those on digital platforms.
More so there is no verification method for anyone to confirm the source of funds as to whether they are free funds in line with the definition of same or from any other sources.
It therefore appears that authorities are approaching the country’s currency problem in a piece meal fashion.
Many observers have in the past recommended, and the authorities are encouraged to do so, to repeal the 2019 regulations of SI 142, let the market determine the exchange rate openly by full liberalisation and confirm that Zimbabwe has two currencies.
The stability and certainty that the authorities are attempting to achieve will be achieved by these measures.
This will allow industry to plan and carry out investments that will promote increased production and exports going forward to a point where the full adoption of the local currency will become expedient.
Misheck is a former expatriate banker based in several SADC countries and currently works as a corporate advisory services consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society. He can be contacted on (263) 777052004/712808140 [email protected]; Linkedin: https://www.linkedin.com/in/misheckugaro; Twitter: @twitcagan.com
