Taking Stock Kudzanai Sharara
The Reserve Bank of Zimbabwe will have to share more information on the foreign currency auction trading system than it did on Tuesday, if it is to gain confidence and trust from the market.
Due to its policy missteps and reversals, the central bank has lost public confidence and any attempt to move ahead as if things are normal will result in more trust deficit.
While the central bank blames speculators and manipulators for the country’s currency instability, economic statistics points to policy missteps and inconsistency.
Many believe, money supply growth is at the centre of the country’s currency instability. Controlling money supply growth, is one of the central bank’s mandate, but statistics released show money supply growth is still on the high side. Between June 2019 and second week of June 2020, reserve money had grown by 307 percent.
Some blame currency instability on access to cheap money given the low interest rates, and this again is a responsibility of the central bank.
The central bank’s continuous meddling in how foreign currency is traded and used is also largely to blame for the exchange rate’s instability.
For long the apex bank has refused to let market forces determine the exchange rate.
So opaque have been the operations of the central bank, that economic agents are in the dark on what exactly is the status of money supply in the country.
The central bank last released Monthly Economic Reports back in December 2019 and the recent attempt to give a Reserve Money Update was not convincing as there were some inconsistencies in the figures provided.
A good example is the Reserve Money amount for December 2019. In the December 2019 Monthly Economic Review Report the figure was recorded at $8,7 billion and yet in the Reserve Money Update released on June 12, 2020, the figure was now recorded at $10,3 billion.
While financial statements can be revised, a $1,6 billion variance raises eyebrows.
Comparing the reserve money balance as stated in the June 2019 monthly report, and the June balance contained in the December 2019 monthly report also shows a huge variance.
This hardly builds confidence and trust which are, however, very vital for currency stability.
The speculating and forward pricing that we are seeing being practiced by businesses, is a result of trust deficit in the monetary authorities.
If the local currency is to find any support and acceptance, then the RBZ should go all out to be transparent. There is no other way than for the central bank to practice full disclosure otherwise its efforts will again come to naught.
The foreign currency auctions system for example has been tried before, but was abandoned within a few months.
One would expect the central bank to be at the forefront of explaining what is it that is being done differently.
Given the precarious situation the country’s economy is in, introducing such a system is not something that can be done through a statement, and expect everyone to be on the same page.
The central bank governor should have availed himself to the media through a press conference, and take questions even.
The world over the traditional concept of bank secrecy has evolved towards transparency and full disclosure. The central banks are now periodically disclosing information on both currency issuance and the levels of their international reserves. When full disclosure is made, members of the financial community also are able to make better-informed decisions when information is readily available.
Monetary policy, in our view, is apt to work better if the central bank keeps markets better informed. Unfortunately, the RBZ insists on keeping the public in the dark.
The results published by the central bank post the auction system are inconsistence with what was promised.
Omission of key information that was promised resulted in a lot of assumptions, misinterpretations and speculation of what exactly happened during the foreign currency auction. At makes people question whether there was any manipulation or not.
The results that were published Tuesday left out information pertaining to the amount of foreign currency on offer (US$) which is a requirement according to Exchange Control Directive RV175/2020. It’s actually the first of the key information that must be published post every auction.
The total number of bids was also not published, but this is key as it shows the depth of the market.
How many individuals and institutions came looking for money on Tuesday, that information is instructive, but was not released despite being the second requirement according to Exchange Control Directive RV175/2020.
The market was also not told the number of rejected bids. While the market was told the highest bid at 100 and the lowest bid at 25.5, it was not told the highest and lowest bids accepted.
This is according to the central bank’s requirement, but was curiously left out. There is an old adage that a promise is a credit and the central bank is not doing itself a favour by under delivering on its own promises. It kills confidence.
The central bank must not leave the market second-guessing as there is a lot at stake beyond its already battered reputation.