Taking Stock Kudzanai Sharara
That the foreign currency interbank market was not working was never in question as evidence was there for all to see.
We knew it was not working when the Monetary Policy Committee, early this year, told us that since inception only US$1,5 billion had traded on the interbank market as at December 31, 2019, when there are industries that could not access foreign currency to meet their requirements.
We knew the interbank was malfunctioning because the RBZ, instead of the interbank market, was still providing foreign currency to import fuel and electricity among other critical imports.
There was never doubt that the interbank market was not working because industry could not access forex to import raw materials and had to scale down production which reflected in the capacity utilisation for 2019 dropping to 36,4 percent from 48,2 percent prior year.
If there was need for evidence that the interbank market was failing, then it had to be the continued practice by banks to make twinning foreign currency arrangements (matching sellers and buyers of foreign currency) outside the formal market. The margins made outside the interbank market were much higher, hence the unwillingness by some banks, even now, to participate on the formal market.
We knew because exporters were now looking through their value chains and made foreign payment arrangements on behalf of those critical to their business. An executive said recently that exporters were working together and making foreign payment arrangements that smoothen foreign currency needs without resorting to selling or buying from the interbank market.
The IMF was aware and blamed those with vested interests for manipulating the system and fuelling the parallel market.
The RBZ knew, and blamed subsidies on grain, fuel and electricity for the huge growth in money supply. The central bank also put blame on 200 institutions, which it said owned half the $34,5 billion deposits in the banking system.
Government was aware too, that’s why in Wednesday’s press conference, Minister Ncube said he will stop making lumpy payments, as recipients end up buying foreign currency and cause market distortions.
Both Government and the RBZ were fully aware of the shortcomings of the interbank market, that’s why the introduction of a Reuters trading system was talked about more than six months ago.
It was, however, much clearer this week when the premium between the official exchange rate on the interbank market at 18,36 and the parallel market exchange rate at 40 went above 100 percent. So it came as no surprise when Minister Mthuli said:
“Zimbabwe has had no transparent and effective foreign exchange trading platform for a long time. Consequently, official rates have not been effectively determined, while a thriving parallel market has developed.”
The market was well aware of this and wondered why it took long for authorities to accept reality and put in place corrective measures.
What mattered most from yesterday’s statement is how Government plans to bring stability to the exchange rate through the formal market.
Mthuli on the wheel
The first measure was announced early in Minister Ncube’s statement, through the setting up of what he called a “Currency Stabilisation Task Force” chaired by the minister himself.
This was big a statement and speaks a lot to what the minister expects to be done and the capacity or lack of it of the RBZ to execute the task at hand efficiently and effectively.
The world over, issues to do with exchange rate and price stability are dealt with by the central bank, but in this case the minister is moving in to take charge.
Wednesday’s presser was a ministerial statement delivered by Minister Ncube, at the central bank announcing the taking over of a mandate that is historically a preserve of the central bank.
While as a country, at the moment, we are desperate for a solution, what has happened is a precedence that might haunt current or future generations. To be honest, this is a vote of no confidence in the RBZ as an institution to execute its mandate. It speaks to some identified but unexpressed weaknesses authorities thought might prevent the RBZ, led by governor Dr John Mangudya, to execute the task at hand.
Execution will be key
Looking at the measures meant to strengthen and stabilise the exchange rate, Minister Ncube said; “The RBZ will continue to be a significant player in the market, providing liquidity to stabilise the exchange rate, where necessary.”
This is what central banks do in a managed floating exchange rate regime — they buy and sell foreign currency. A managed floating exchange rate is a regime that allows an issuing central bank to intervene regularly in foreign currency markets in order to change the direction of the currency’s float and shore up its balance of payments in excessively volatile periods. But as it stands, there is no evidence to suggest the central bank has enough resources to influence and stabilise the market.
The apex bank retains certain percentages of export proceeds, for example 45 percent from gold producers, but in the past, it has been using this forex to meet fuel requirements among other critical imports. There is need for a bailout package that the apex bank can use, but unless it’s been kept a secret, a bailout is something we do not have.
Managing the exchange rate float can also be done through mopping local dollars from the market through open market operations (OMOs), but the central bank will have to up its game if it is to entice Zimbabwe dollar cash holders from buying foreign currency into buying corporate bills. Currently inflation is elevated while the bank rate is at 35 percent, making returns on money market instruments negative.
In terms of specific steps that the RBZ needs to take it is worrying that banks are being “invited” and that the system will be started by a “coalition of the willing”. The minister hopefully will be decisive on this one, its either you participate on the platform or you don’t trade or even handle foreign currency at all.
This should not be optional but compulsory, all forex trading should be on the Reuters trading system. It is known that, despite the introduction of the interbank market, banks are still the biggest intermediary between those with and those without foreign currency. Industrialists will tell you they get offers everyday outside the formal system and that should not be allowed into the future.
Key points, if implemented, that will support the new measures, are plans to “smoothen expenditure disbursements so that large or lumpy Zimbabwe dollar payments are not bunched which would disrupt the foreign exchange market”.
Lumpy payments to beneficiaries of state contracts gives them the capacity to push the rate and if Minister Mthuli is to find a way of staggering their payments, he would have solved part of the problem. The other way is for Government to do business with many more other players to share the national cake and spread payments according to signed contracts which will most likely be varied.
The other point is the decision to charge taxes, duties, fees and other Government charges in local currency. Apart from removing distortions, it forces exporters, and anyone with foreign currency to dispose in exchange for local currency hence strengthening its demand and stability. This is what happens the world over, when foreign investors come into a country, they sell their home currencies in exchange for the host country’s currency which boosts demand.
The bottom line, however, is that what we lack in this country is production. We need to put in place policies that encourage production. One of our biggest asset is the land, and the responsible ministry must make sure that all issues hindering investment and production into the sector are ironed out. Drought or no drought, there are some farms near dams that should still be able to produce adequate requirements. The other resource is our minerals, while we have attracted investments in recent times, what is important is that we have policies in place that encourage production and maximum benefit for the country.