Taking Stock Kudzanai Sharara
The fight against the country’s weakening currency continued this week with Finance and Economic Development Minister Mthuli Ncube taking drastic measures which if successful, might be for the greater good of the economy, but if unsuccessful, might have a long term damage to the country’s ability to attract investment.
Since the introduction of official trading of the local dollar in February 2019, it has devalued from a start rate of 2,5 to the United States dollar, to the current 24,5749 on the official interbank market and 43 on the parallel market. This is what forced authorities to take measures they believe will stabilise the local currency.
While there is no doubt that the local currency is in desperate need for stability, the question, however, is whether the authorities are making the right calls in terms of measures they are taking. We look at a few decisions made, but that we believe are undermining certain institutions and might result in unintended consequences going forward.
Last week, on this column, we wrote about Minister Ncube’s decision to establish a currency stabilisation task force that will be led by the minister himself. This was an unprecedented move as the task force effectively assumed some of the roles that are normally the mandate of the Reserve Bank of Zimbabwe.
According to Section 47 Subsection 1 of the RBZ Act, the exchange rate policy of Zimbabwe shall be formulated by the Minister in consultation with the Board (presumably RBZ Board), and in doing so, the Minister shall ensure that the exchange rate policy is consistent with the objectives of the monetary policy of Zimbabwe.
Fair enough, but did the Minister, through setting up a task force, which he chairs, not go beyond formulating the exchange rate policy?
“In order to stabilise the exchange rate and hence, to lower inflation, the Government has decided to implement a holistic package of key policy measures. In this regard, a Currency Stabilisation Task Force has been set up.
“The Task Force will be chaired by the Minister of Finance and will meet at least once a week to review the conditions in the markets, monitor the behaviour of key variables such as the exchange rate and inflation, and to ensure that the measures that I outline below are expeditiously implemented,” read parts of the Minister’s statement last week.
It appears the task force will be dealing with issues that are traditionally and constituently the preserve of the RBZ Act Section 6 which says one of the functions of the central bank is to “achieve and maintain the stability of the Zimbabwe dollar”.
The key words there being stability of the Zimbabwe dollar, which ironically speaks to Minister Ncube’s task force’s name, “Currency Stabilisation Task Force”.
Minister Ncube could simply have said the country’s exchange rate policy is that the exchange rate shall be determined through a managed float using the Reuters trading system and let the RBZ perform its mandate according to Section 47 subsection 2 which reads
“The Bank shall be responsible for implementing the exchange rate policy formulated in terms of Section 47 Subsection 1”.
Our conclusion last week was that the Minister was setting a bad precedence of emasculating the RBZ as an institution.
Over the weekend the minister was back again, making moves that are meant to achieve and maintain the stability of the Zimbabwe dollar. This time, using his powers, the minister undermined capital market regulator Securities and Exchange Commission and by extension the Zimbabwe Stock Exchange.
Following suspicion that there could be abuse of the fungibility status of ZSE listed stocks, Old Mutual in particular, the Securities and Exchange Commission of Zimbabwe (SECZ) on March 12, 2020 issued directive SS 12/03/2020, in terms of the FIRST SCHEDULE, paragraph 21 of the Securities and Exchange Act (Chapter 24: 25).
The directive sought to “prescribe additional Know Your Customer (KYC) and Enhanced Due Diligence requirements on the handling and transfer of fungible shares from external registers into Zimbabwe”.
In addition, SECZ was to “immediately undertake an audit of all transaction inflows on the dual listed shares that were consummated with effect from June 1, 2019”.
All suspicious transactions were to be flagged and dealt with in terms of the relevant laws, particularly the Money Laundering and Proceeds of Crime Act [Chapter 9:24] and the Securities and Exchange Act (Chapter 24:25), according to SECZ.
But before securities market intermediaries could digest this directive, Minister Ncube, through General Notice 583 of 2020, moved in to suspend the fungibility status of the said shares, making parts of SECZ’s directive academic.
Market watchers believe the minister should have waited for the findings and dealt with the culprits suspected of violating the laws.
Investigations could have been done quietly without unnerving investors. But after the minister’s intervention, market players would want to know on what basis he suspended fungibility status of three international companies? What evidence was there to justify such drastic action?
Moreover, the idea that Government dabbles in issues where it has already put in place regulators undermines the same institutions.
Minister Ncube could have simply acted through SECZ without direct interference. But his decision weakens SECZ and paints it as an institution that is not capable of enacting and enforcing rules for capital markets.
Zimbabwe’s capital markets are not in good space at the moment with foreign investors having had investments locked in the country for approximately 5 years.
Old Mutual had become an avenue for some of them to repatriate funds, but they now have to endure another year because some within the capital markets lacked discipline, which unfortunately is not even substantiated by evidence.
This also mean investors will have to wait until our foreign currency challenges are resolved and the ability to repatriate funds is restored before they venture into local capital markets again. This will not only have a negative impact on portfolio inflows but will by extension impact FDI inflows.
Since the announcement, Old Mutual has lost 27,44 percent of its value and has dragged the rest of the market with it. PPC has lost 19,04 percent while Seed Co International recorded a marginal 0,92 percent. The ZSE overall market capitalisation lost 6,30 percent since Monday.
By suspending the fungibility of Old Mutual, PPC, and Seed Co international, the minister removed a very key component of the capital markets, which is the ability to hedge against currency volatility something which is very important for local investors who are unable to invest offshore.
The ZSE will also see this as a major blow as it recently partnered the Botswana Stock Exchange to help foster prosperity of their financial markets, promote cross border investments, cross border listings and explore further opportunities for co-operation between the 2 institutions. Fungibility of shares between the two capital markets would have been a key value proposition.
In conclusion, what is needed in our capital and foreign currency markets is to allow market forces to determine prices and when rules are violated, allow institutions and set regulators to perform their mandate. If it’s a case of incompetence, then people must be shown the door without undermining the institutions.