Government is failing to find traction in its new economic policies because it left too many uncertainties in place, renowned economist John Robertson has said.
In his second quarter review, Robertson, while acknowledging that numerous steps had been taken to mend the economy, said “too many uncertainties can be seen to have been left in place”.
Robertson singled out changes made by the monetary authorities as having left remnants of the past years, where the central bank had significant control at the expense of market forces.
In February this year, the Reserve Bank of Zimbabwe, introduced the interbank market where foreign currency trading was expected to be determined by market forces.
Market players, however, believe the central bank has been using moral suasion to influence trading on the interbank market.
Less than US$100 million traded
As a result, trading on the interbank platform has been subdued, with less than US$100 million having exchanged hands since inception on February 22, 2019.
This is at a time industry says it needs at least US$300 million per month to meet its import requirements.
“When measures to restore confidence were expected, the Government, under new management, did make important personnel changes and did pass amendments to some ill-conceived pieces of legislation, but its determination to retain control over payments to foreign suppliers reaffirmed the official attitude that market forces should be subject to government control,” said Robertson.
Before Tuesday this week, the central bank was still in charge of allocating foreign currency to fuel dealers, a move seen by many as undermining confidence in the foreign currency market. Its good that the practice has now been stopped.
Although more than US$800 million is said to be held in nostro accounts, holders were said to be reluctant to be selling on the interbank market until the official exchange rate more accurately reflects the RTGS dollars’ loss of value.
Robertson also believes the launch of local currency, the RTGS dollar, was premature and instead of bringing stability and confidence, brought uncertainty.
He said, the previously identified minimum requirements for the launch of a new Zimbabwe currency had not been met.
“These were listed in the October 2018 Monetary Policy Statement and they included the need to improve the economy’s productive capacity, the need to build on the country’s foreign reserves, the need to re-engage with the IMF and the World Bank and the need to pay off outstanding foreign debts to “strengthen the economy’s external position”.
Robertson also reckons that the retention thresholds set by the central bank on foreign earnings by exporters undermines the overall impact of policies.
“Normally, market forces ensure that supply and demand relationships will set the price, in this case the US dollar rate, but on the supply side, the money reaching the banks is affected by government’s decision to insist on the surrender, to them, of specific percentages of each exporters’ foreign exchange receipts,” he said.
Some banks not playing ball
Banks that were not participating on the interbank market are also said to be a source of market distortions.
According to Robertson, banks that choose not to participate in the efforts needed to establish a single market are responsible for causing the many distortions.
“These banks are acting as agents for those who choose not to deposit their funds in bank accounts, but prefer to play the market while the US dollar scarcity can be exploited.
“These holders of funds need the services of banks to complete payment and transfer transactions, but they, and their banks, are displaying an unwillingness to forego the additional profits that can be made from deals at black market rates,” he said.
“As a result, the country has yet to develop the needed banking sector-wide consensus on what the exchange rate should be, so uncertainty remains firmly in place,” Robertson said.
This practice, which was described by the RBZ as “twinning arrangements” have finally been prohibited. In a directive issues in terms of Section 35 (1) of the exchange control regulations statutory instrument 109 of 1996, the RBZ directed Authorised Dealers “to cease forth with facilitating twinning arrangements between sellers and buyers of foreign currency.”
Poor implementation to blame
Walter Mandeya, an analyst with Trigrams Investment concurred with Robertson saying poor implementation has led to a general lack of confidence in Government’s ability to deliver on stated objectives.
“Zimbabwe’s economic policies have always been “unique”. While this in itself is not a problem as the economy has very strong underlying fundamentals as demonstrated by out-turn figures for agriculture, mining and tourism, the lack of clear overarching long-term policy objectives, creation of negative arbitrage, patronage and rent seeking opportunities coupled with poor implementation has led to a general lack of confidence in Government’s ability to deliver on stated objectives.
“With regards to the fiscal and monetary reforms currently underway, especially the currency reforms that saw the introduction of the RTGS dollar, an urgent review of Government policies is needed to realign stated policy objectives with the feedback from the markets,” Mandeya said.
He called on Government to further increase retention levels for exporters saying this will not only resolve some of the pricing distortions in the market, but will encourage greater export growth.
“There is need to remove all controls on the interbank market such that the exchange rate on this market is truly reflective of the demand and supply for forex. This will bring greater confidence in the formal price discovery systems and reduce the impact of black markets within the overall economic pricing structures,” he added.