eBusiness Weekly
Kudzanai Sharara and Golden Sibanda
Zimbabwean economists wantReserve Bank of Zimbabwe Governor Dr John Mangudya to increase foreign currency retention thresholds for exporters, libelarise the US dollar exchange rate and introduce an interbank market as Zimbabwe advances towards a new local currency over the next 12 to 18 months.
A new currency is unlikely to be created in a single big bang but is more likely to be the culmination of a number of steps, each fairly modest in itself, during a process that maximizes the gains but minimizes the negative side-effects.
In an interview with Zimpapers Television Network (ZTN) on Monday, economist Eddie Cross, who generally pushes the bigger steps more than the authorities, said monetary reforms had now reached a stage where the authorities will float the local currency (RTGS and bond notes) against the US dollar on an interbank market.
“It started (reforms) …..when the RBZ said, the RTGS platform would be used to trade foreign exchange, so every bank has foreign bank accounts and there is foreign exchange in the bank accounts but at the moment these reserves of foreign exchange are locked up, they cannot be utilised in the market place.”
Cross said what was needed was to allow banks to start trading foreign currency on an interbank market without the involvement of the RBZ that should now shift to its traditional role of being the lender of last resort, as well as supervising and regulating banks.
“So what they need to do is to give banks the authority to start trading, I understand that has not happened yet, mainly for technical reasons, but I expect in this coming week banks will find a solution and what we will see then is, the banks will start trading and will get an official exchange rate for the RTGS dollar.”
He said this will allow individuals and institutions to be able to buy hard currency in a local bank “and I am told that’s a reality by some senior bank managers.”
Cross said moving to the next step of liberalising the exchange rate was, however, might be delayed by arguments “at the top” about how far to go.
Cross’s sentiments were echoed by former Government advisor and University of Zimbabwe economics lecturer Professor Ashok Chakravati, who said that the Reserve Bank should introduce the interbank market.
He said the central bank needed to establish an interbank market and allow the importers and exporters to trade foreign currency, which he said would determine a sustainable rate of exchange and more efficient allocation of hard currency.
“The fundamental problem that we have right now is that we do not have a mechanism for trading of foreign exchange between most people who are earning it, like your exporters and the Diaspora and those people who are importers, like industrialists.”
Prof Chakravati said it was wrong for the central bank to continue to control the allocation of foreign currency to the market amid the shortages, which have seen some companies failing to get allocations altogether or getting inadequate funds.
“We are saying that this is all wrong, there is actually a lot of foreign exchange, which is being earned by the exporters and those Diaspora people. What they should do is open an interbank platform for trading of foreign currency between exporters and those who want to import priority items.
“That way, our industrial sector does not go and apply to the Reserve Bank (for foreign currency). There is no country where people go to the Reserve Bank for foreign exchange, they apply to the banks; this money is in the banks. Do you know that the nostro accounts of the banks are increasing everyday? There is plenty of foreign exchange.
Look at the Reserve Bank statistics and see how it (foreign currency balances) are going up,” Prof Chakravati said.
He said there was a lot of foreign currency in the banks and all the country needed to do was for the monetary policy to introduce an interbank foreign exchange market, which he said will sort most of the problems facing the country in this area.
“We will be able to achieve the Government’s goal and stabilisation programme. If you want to achieve high rate of growth, achieve the TSP, the monetary policy is critical and needs to introduce an interbank market immediately.
Floating could release US$2 billion into the market
As a compromise and to strike balance, Cross thought Dr Mangudya should allow that at least 80 percent of all foreign exchange be held by the exporter, up from 55 percent “which will release about US$2 billion into the market place.”
And if that was done? “I expect that the release of the hard currency to the market will result in the informal rate of the US dollar to drop down to about 1:3 that’s what I would expect,” said Cross.
He noted that this model will see the RBZ getting at least US$1 billion for critical allocations.
For this amount, said Cross, the critical thing is the RBZ must be required to pay a market related rate.
“The 1:1 ratio is the key source of the instability we see at the moment, but by the moment we are at a market driven basis I think we will see the market stabilise. He said the market will regulate current challenges of liquidity, “I think we have adequate foreign currency to meet our demands.”
Prof Chakravati said it was true Zimbabwe had shortage of foreign currency relative to demand, but he pointed out that if introduced the interbank platform would have to be a managed market, not any open one where everyone do as they please.
“Such a managed market has been (successfully) introduced in West Africa, Nigeria, Angola and many other countries in Africa. So when we have such a managed market, then we will be able to control the exchange rate.
“Also, we have to remember if you look at our earnings in foreign exchange, there is about US$3,5 billion to US$4 billion, which is not part of the money the mining sector surrenders to the central bank,” Prof Chakravati said.
He opined that if say US$3,5 billion was put onto the interbank market, it would have the effect of lowering the US dollar to bond note or real time gross settlement (RTGS) exchange rate, which has been running wild on the black market.
Harare economist Brains Muchemwa said the Reserve Bank of Zimbabwe was now fighting for relevance on progressive matters of policy, in particular guidance regarding with regard to the currency regime.
“The forth coming monetary policy should at least instill market confidence by floating the exchange rate to protect real time gross settlement (RTGS money) that is now being slowly sidelined in the wake of dollarisation,” Muchemwa said.
Muchemwa said the policy makers had for quite some time procrastinated or delayed making the right policy decisions on key aspects of the currency issue. In the absence of such policy guidance, “ the market has been relying on its whims and devices and in the process rendering policy ineffective and irrelevant.”
DEAT Capital managing director Nicky Moyo said the Reserve Bank “clearly needed to allow exporters to keep their funds and RBZ must then buy forex from willing exporters/sellers.” He also said the central bank should clearly outline the benchmarks and timelines for introduction of domestic currency.
Further, Moyo said the Reserve Bank should do a proper audit of the bond notes that are in circulation and indicate value backed by US dollar Afreximbank facility, which is the premise of its policy position that the domestic surrogate currency, ranks pari passu with the US dollar, that is 1-1.
“The central bank needs also to open the bond to public auctions. The market needs to properly quantify how much of Government debt is in the market,” he said.
Let market forces reign
Meanwhile economist John Robertson said government should leave foreign exchange rates to be established through free interaction of currency buyers and sellers, “all of whom must also show that they are not speculators and not simply trying to externalise hard currency.”
In his February 2019 Economic Outlook Report, Robertson said the exchange rate remains perhaps the most serious of the many uncertainties affecting costs and prices in the economy.
The costs of doing business as well as prices of most goods and services have more than doubled, although inflation figures for December showed a year-on-year inflation of just above 42 percent as some items such as rent have remained static and in some cases negative.
According to Robertson, the difficulties in fuel pricing appear to have driven the monetary policy to its limits making the need for currency reforms imperative.
Zimbabwe’s remaining option is to convert its RTGS balances into an official currency that will have to fend for itself on the market, says Robertson.
The sensible thing to do is to let market forces take charge and let them establish the best way forward, he says.
“Government should be advised to leave this rate to be established by interactions between business operators who are trying to sustain active enterprises. Commercial banks could be invited to establish trading mechanisms that permit the free interaction of currency buyers and sellers, all of whom must also show that they are not speculators and not simply trying to externalise hard currency.
“Daily or weekly the exchange rates could be established and applied to all transactions. The Reserve Bank would expect to monitor transactions, but should rely on the commercial banks to manage the system in a manner that is fully accountable and subject to public disclosure,” said Robertson.
There are, however, limitations to what Government can do for the country to come out of the current predicament, as it also tries to preserve currency values for investors and depositors.
Formalising the already apparent devaluation of the funds that make up Zimbabwe’s RTGS balances will have serious implications for personal and corporate savings and for the banks holding yet – to – mature Government paper.
Falls in the values of these assets will impact on the levels of investment that can be funded locally, and Robertson says the available option is to increase the country’s efforts to attract the attention of foreign investors.
This can be supported by rebuilding production levels sufficiently to become less dependent on imports, and to follow this by increasing export revenues by the amounts needed to settle debts and accumulate foreign reserves.
