Secretary in the Ministry of Finance and Economic Development George Guvamatanga this week shared some interesting statistics with regards the country’s monetary status and how the exchange rate is likely to find its equilibrium going into the future.
Speaking in an interview with a local media outlet, Guvamatanga reiterated what he has always been saying that there is simply not enough money to sustain the current parallel market exchange rate of 1:4 or higher. His logic and that of central bank Governor Dr John Mangudya is that even if importers are to buy foreign currency at a rate of 4, their produce will be beyond what many can afford as they reckon there will be consumer resistant as shown by the Edgars results where sales dropped by approximately 37 percent in the last quarter of 2018 as prices sky-rocketed.
According to Guvamatanga, the total deposits as of the first week of March both in local RTGS$ and in Nostro FCA is RTGS$9,2 billion and US$700 million respectively.
Of the local deposits, RTGS$4 billion is in borrowings, RTGS$3 billion is in Treasury Bills (sounds low), while RTGS$1 billion is in the RBZ’s savings bonds.
This, he says, leaves only RTGS$2 billion as liquid money that can be used to either pay for utilities, to buy shares, or to buy foreign currency.
He also said of this amount, 60 percent or RTGS$1,2 billion is likely going to be used to pay for local requirements in RTGS$, leaving the balance of RTGS$800 million to buy US$ for foreign obligations.
According to Guvamatanga, at a rate of 4, this liquid money of RTGS$800 million can only buy US$200 million, and this in a sector where FCA deposits are said to be around US$700 million while the country’s export proceeds averages US$450 million every month.
Quite revealing, this is, but it also raises more questions. The decision to leave out borrowings out of the money chasing US dollars is one good example. Why should they be excluded? Some of the borrowings are for consumptive purposes and some of that consumption is imported hence leads to demand for dollars.
Credit to the private sector recorded an annual growth of 9,12 percent in December 2018 to $4 billion.
It’s not far-fetched to say a portion of that money is circulating in the hands of the borrower and impacting the exchange rates, liquidity and money supply, especially if it was consumptive borrowing. Unless we are saying the bulk of the money is in old loans and has already been mopped out of the system to have an impact on forex demand.
Why is business still struggling to access forex?
Talking to industry and those looking at making foreign payments, the success rate of accessing foreign currency on the interbank rate has been very low. CZI president Sifelani Jabangwe believes the authorities did not want a big bang movement in the exchange rate before the market is liquid enough to absorb requirements. This has seen the rate move gradually from the start rate of 2,5 to the 3,013 as at Thursday morning.
Jabangwe believes holders of foreign currency would be comfortable with a rate of 3,5 which some have been liquidating at prior to the Monetary Policy Statement and have also been offering foreign currency outside the formal system.
There is a general census among various players in the country, that the economy is generating enough foreign currency to meet its requirements for as long as treasury keeps its spending in check as promised in both the 2019 National Budget and the Transitional Stabilisation Programme.
If the country is indeed holding on more than US$700 in FCA deposits, then at a rate of 3, it would need approximately RTGS$2,1 billion to be able to mop out everything, or slightly more if the rate moves to 3,5.
Treasury and the monetary authorities would like us to believe there isn’t as much as RTGS$2 billion looking to be exchanged into US dollars.
What is, however, clear is that the formal rate has not yet reached its equilibrium to entice exporters to liquidate their holdings and business continues to thirsty for foreign currency.
What’s driving the current rate of 1:4?
Given the low start rate of 2,5 and the gradual movement of the rate since the introduction of the interbank foreign currency market, confidence has been low amid doubts the market has been fully liberalised.
Confidence is further dampened when efforts to buy foreign currency from the formal market are met with little success. This will result in continued use of the informal market as a platform for easy access for dollars.
While the rate in the formal market is stable or activity is non-existent, there is a sizeable amount of foreign currency that comes through informal channels that those desperate for the US dollar can still access. The informal market is also a fragmented market and there is information asymmetry making it susceptible to huge rate swings.
In addition, one has to make it very attractive to get holders of foreign currency, even those keeping it for the rainy day, to come and sell.
When there are obligations to be met, the going rate becomes irrelevant, just like those buying Old Mutual at a huge premium, some deals will be made at such very high rates, but in most cases, it’s not your usual business that is willing to pay a high rate as that is not sustainable, at least not in an economy where disposable incomes have been eroded significantly.
But then again the country’s economy is not dominated by your usual business entity, it’s largely informal and prices that consumers are made to pay in some instances make up for the high forex rates. A business charging four or five times above the import parity, will not shy away from paying some of the high exchange rates when in need of foreign currency.
When will the market become liquid?
The start of the tobacco selling season was expected to bring the much needed liquidity.
The thinking was that farmers will have many local obligations to force them to liquidate their foreign currency. Given the spending and savings patterns in the country, chances are that a sizeable chunk of what farmers get will be expended in the shortest period of time and in the process oiling the economy.
The tobacco selling season has, however, had a false start, with farmers delivering far less in the first few days of opening auction floors. Confusion reigned amid news that farmers will first be paid 100 percent in RTGS$ then apply to the banks for their 50 percent forex allocation.
This was, however, reversed as farmers held on to their crop. However, the process is not yet smooth enough as most farmers are still to open FCA accounts, let alone understand the whole process and how it operates.
Let it float!
Based on the figures that Guvamatanga gave, authorities should not have any problem allowing free market forces, because the correction to their equilibrium exchange rate will happen quickly as people run out of money. But they seem to have their own method.
“We are expecting the rate on the alternative market will come down,” Guvamatanga said in Parliament recently.
“The models we have worked on have shown a lower side of 1,86 and a higher end of 2,53.”
However, the market seems to have negatively judged their method; but soon we will find out who is bluffing.
The market is, however, likely to become liquid anytime from now as we are past the 30-day period that exporters are expected to use or sell their foreign currency holdings. In the 2019 MPS, the RBZ said exporters would be allowed to retain a prescribed percentage of their export proceeds in hard currency for only 30 days, after which the unused funds will be released onto the market at the prevailing exchange rate.
The exact amount, that will be released to the market is, however, not known but it should be from the $700 million that is said to be already deposited in nostro accounts.
If activity on the tobacco auction floors is smoothened, then some kind of liquidity can also be released to the market.
From what exporters are saying, a rate of 3,5 should be comfortable enough for them to release forex.
Time will soon tell.