eBusiness Weekly
Business Writer
The exchange rate indexed open market operations instrument that the Reserve Bank of Zimbabwe plans to introduce into the market, will go a long way in mopping up excess liquidity, but safeguards to minimise risk must be put in place to encourage optimal uptake.
On Tuesday, the central bank, through a statement issued by the Monetary Policy Committee, announced it had resolved to introduce “an exchange rate indexed open market operations instrument” open for uptake by individuals and entities with excess liquidity.
As part of its features, the principal amount of this instrument will be linked to the auction determined exchange rate. It will earn interest at the rate of 5 percent per annum (subject to review from time to time) and will be settled in Zimbabwe dollars.
Its maturity will vary from 30 days to 360 days. The instrument is part of a broader monetary policy strategic thrust of ensuring exchange rate and price stability.
In his 2020 Monetary Policy Statement (2020 MPS), central bank governor Dr John Mangudya announced that the bank would use monetary targeting framework to manage the stock of money or liquidity.
Excess liquidity is largely blamed for exchange rate and price instability.
The central bank said it is therefore committed to the full implementation of the monetary targeting framework to regulate the amount of money supply in the economy.
“This framework will be operationalised through the use of existing open market operations tools that include Treasury Bills, Savings Bonds, Corporate Bonds and Statutory Reserve Requirements,” reads part of the 2020 MPS.
While most of the above instruments, such as Treasury Bills and Savings Bonds have since been introduced, the level of money supply has remained of major concern and has been blamed for exchange rate and price instability.
As at April 2020, broad money supply had reached $52 billion while reserve money was above $13,3 billion as at June 19, 2020.
Market watchers, though cautious, are of the opinion that an exchange rate indexed OMO instrument, commonly known as Principal Exchange Rate Linked Security offers better features for investors and excess cash holders.
Principal exchange rate linked securities (PERLs) are debt securities, or debt instruments bought or sold between two parties within defined terms, that make interest payments and have yield linked to the exchange rate of currencies.
A PERL is a type of dual currency bond that pays the coupon and the principal in the base currency (in this case the Zimbabwe dollar).
The principal payments increase as the foreign currency appreciates relative to the base currency. The payments can also decrease as foreign currency declines.
In simple terms, the principal repayment depends on the exchange rate of the Zimbabwe dollar against the US dollar.
A company wishing to expand into foreign currency can safely do so via the purchase of PERLs, which allows for the currency to retain its value plus interest.
Market watchers are of the opinion that pension and insurance fund managers would find this instrument attractive leaving banks with limited liquidity.
Uptake of the instrument is expected to reduce demand for foreign currency as a hedge for the depreciating Zimbabwe dollar.
Economic commentator and founding chairman of the SME Association of Zimbabwe, Farai Mutambanengwe, said the PERLs instruments “gives investors an alternative to buying currency or speculating on the stock market, while at the same time binding Government to ensure the exchange rate at the very least stabilises, if not appreciates”.
The instruments are, however, not without risk given numerous policy changes the central bank and Government often announce within a short space of time.
While new instruments are said to be exchange rate indexed there is no guarantee what exchange rate policy will be in place in a few months’ time. Whatever the exchange rate policy will be in place, the official exchange will have to be juxtaposed with the parallel market exchange rate.
A converged or narrow gap would be the preferred scenario but there is no guarantee that the central bank will stay on this new
path where the exchange rate will be determined through a foreign currency auction system.
Mutambanengwe highlighted this and said “the main risk would be that the exchange rate continues to run unabated, but that would only happen if RBZ continues to print money, which we are currently assured is not happening, and will not happen.”
But if the rate continues to run, how will they fund the outlay is another question raised by some market players.
A fund manager with a local asset management firm who requested for anonymity, said the risk is that history will repeat itself as long as there are no safeguards put from outside the RBZ.
“Look at everything that the RBZ has done, nothing ends well. The bond note, the US$ RTGS system, the special Treasury Bills for command agriculture, the Reuters forex system, among others. The RBZ always finds a way to compromise their own promises.
“As a hedge, yes, they are actually a very good idea. They also help with liquidity management in the system and could actually be very good as tradable instruments.
“I think they need greater security for them to become attractive. Or maybe they could be gold backed, and that way the amount of gold could be periodically verified independently.”
