IMF SDRs to boost reserves, but . . .

27 Aug, 2021 - 00:08 0 Views
IMF SDRs to boost reserves,  but . . .

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Reserve Bank of Zimbabwe  (RBZ) Governor John Mangudya was very careful this week when talking about the equivalent of US$961 million deposited into the Zimbabwean account at the International Monetary Fund (IMF) to make it clear that while this was extremely useful, it was not going to suddenly solve a number of underlying monetary issues.

To put the special grant into perspective, it is around 18,6 percent of the expected total export earnings this year, and is even less than the total Diaspora remittances, just over 70 percent of what Zimbabweans living outside the country are expected to send back home this year.

So yes, while close to US$1 billion in foreign currency more than we expected is going to make a big difference, it is a one-shot injection that helps the Reserve Bank create official reserves and will provide some liquidity for the Reserve Bank but is not going to sort out what is now seen as the major challenge, how we recycle through the market our export and diaspora earnings.

Just to keep the excitement in perspective, Dr Mangudya and the fiscal chief, Minister of Finance and Economic Development Mthuli Ncube, have made it jointly clear and abundantly clear that this injection is not going to be squandered or used for short term gains. 

For a start the IMF made the grants across the world to help member states cope with the adverse effects of the Covid-19 pandemic, and the retraction in trade in economic growth that followed, mainly from all those national lockdowns and the need to fund vaccination programmes. 

So we already know from what these heads of our economic management team have already said, that some of the money will be used for budgetary support, to help fund the extra social payments to those whose livelihood was severely damaged, to help fund the easy loan programmes for those sectors that were basically shut down by the lockdowns, and to ensure that we can keep up our already impressive vaccine procurement programme and our equally impressive upgrade of the public health sector. 

We were doing all of this using our own money, but the modest injection will reduce the need of the Treasury to juggle the budget to make sure our hard-won fiscal rectitude and discipline remains in place.

The rest of the injection, the bulk of it, has been allocated to accelerate the capital development programmes, building up the social and physical infrastructure and building up a little quicker than expected the revolving funds that the productive sectors need to grow a little faster and operate a bit more effectively. 

So some of the foreign currency can be put in the pool for sale, because a lot of the budgetary support and a fair slice of the extra infrastructure development is done in local currency. Social payments, for example, are in mobile money transfers; bricks and cement are local products. But some needs to be used as foreign currency.

So with the very careful spending plans in place, we can expect a bit of short-term relief for importers who at the moment can wait up to two months between their allotments of foreign currency on the auctions and the actual transfer to their foreign suppliers, but that is about it. 

The serious “imperfect market” remains. There are three sets of facts we need to consider when looking at solutions to make the market work better.

The first is that Zimbabwe actually earns enough foreign currency. Our current account is in surplus, with that surplus estimated to exceed US$611 million this year. The trade balance will be very slightly negative, since local producers are now starting to buy more capital equipment to replace some of the museum pieces they have using and to expand production, but that is easily covered by the other inflows of foreign currency. And whatever else we do we need to keep that capital spending in place.

So the second fact comes into play: how those normal inflows are used. We now know that about 30 percent of foreign currency transactions are funded from the weekly auctions and another 7 percent funded through the interbank market, that is legal holders of foreign currency selling some through their bank at the average auction rate. 

The other 63 percent of foreign currency transactions are funded from FCA accounts. Some of this is perfectly proper and market related. Net exporters cannot use the auctions and so buy their equipment, buy their raw materials and pay dividends from their retained export earnings. That was the main reason for the retention schemes. But other payments appear to be FCA account to FCA account, and that can be questionable.

The third fact is that those who have net inflows of foreign currency are building up their bank accounts. We now have US$1,7 billion held in nostro accounts in the banking system and the total is growing monthly. This is largely the cash holdings by net exporters who have not spent that money and have declined to sell it. So it just sits there, earning no interest, as a relatively secure cash hoard. 

Some of course needs to be held. An exporter needs liquidity for normal operations; an exporter may be saving up to buy some fancy new equipment; an exporter owned by foreign investors pays dividends perhaps twice a year so needs a decent positive balance in their bank account. But as we are talking about US$1,7 billion we must also recognise that some is the equivalent of the banknotes stuffed in a tin trunk.

There have already been calls for the banking sector to start tapping these reserves, or at least a modest portion of them with Finance Permanent Secretary George Guvamatanga suggesting around 18 percent, for normal banking operations, that is lending basically to importers and of course charging interest that will benefit the holders and give the banks their usual slice.

Enthusiasm is limited. So we may have to start looking at other solutions. Basically it does not really matter whether importers buy currency in the auctions or the interbank market. From the very beginning of the auction system it was assumed that while the auctions would set the exchange rate, a significant fraction of the import requirements would come from the interbank market. At the moment that market provides less than a fifth.

One heavy handed solution would be to reduce the export retention percentages. That would probably be counter-productive since many exporters actually do use their retained export earnings fully. We are still some distance from what would be a normal system whereby export earnings are converted on arrival into local currency but exporters buy their needs easily and automatically from their banks.

This can be regulated. Such total control worked “in the days of Smith” and the early years of independence when the economy was far simpler and smaller, but the wheels came off since bureaucrats are not the obvious experts to make capital spending plans and a lot of our museum pieces in factories date from that era. So that solution can also be scrapped.

So we need to look at more sophisticated solutions. The Reserve Bank did have a rule in place until very recently that a net exporter had to sell after a month or two any of their retained earnings that were not used. This created its own problems since some needed to hold the money for longer, and some regrettably entered that grey area on the sidelines of the black market by buying goods and services for others and in essence setting themselves up as middlemen, and charging a fee, quite often a large fee, for doing this. Legally it was diversification but all it did was raise prices.

But there are grounds for looking at that again in a more nuanced fashion, perhaps something like getting exporters to sell say a quarter of the retained earnings not used in three months, and putting in rules that prevent middleman business. 

We could take that a step further using interest rates. Banks would obviously pay a positive rate for money they lend to others. But those who want to just keep their money in an account could be charged negative rates, at least after a few months, with that “hoarding fee” going to the auctions. 

It would also provide an inducement to some to start using the interbank market to raise funds for productive local investments rather than see their nostro hoard steadily if slowly trickle away.

At the very least they might want to transfer some of their hoard to a positive-interest account that their bank can use, carefully, in trade finance.

There are probably even cleverer solutions, considering the modern sophistication of central and commercial banking. But we are now reaching the stage where this market gap is becoming more serious and we need to think up solutions that keep the confidence of exporters and investors on one hand but which encourage far more normal recycling of export and other foreign earnings. So we need debate. 

The IMF injection, and other moves by the Reserve Bank and Government, provide a short breathing space but we also need more permanent systems in place so we keep breathing afterwards.

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