eBusiness Weekly
Tawanda Musarurwa
Both conventional and unconventional Monetary Policy movements can have positive or negative effects on the insurance and pensions sector.
And in Zimbabwe since the Reserve Bank of Zimbabwe (RBZ)’s February 20, 2019 Monetary Policy Statement, the country’s pensioners have been negatively affected particularly in respect of loss of value in their payouts.
In February, the central bank scrapped its 1:1 parity policy between local bond notes and electronic dollars last month, and introduced an interbank foreign exchange market which has, however, seen the rate remaining at RTGS$2,5 to the United States dollar.
But since then the local currency has been gradually losing value as exporters speculatively hold on to their US dollar earnings in anticipation of the exchange rate to slide.
From the last couple of weeks, the RTGS$ was trading at over 3 to the US dollar on the interbank market about 20,05 percent weaker than its start rate of 2,5042.
And with the prices of basic good constantly rising as companies appear to want to keep up with rising inflation, it is the pensioners who suffer the most as their monthly pay-outs do not get regular upward reviews.
Pensioners are getting a minimum of $80 per month which has been eroded by inflation, and prior to the announcement of the Monetary Policy, the National Social Security Authority (NSSA) had submitted a request to Government for an upward review of monthly pension pay-outs.
But obviously, the economic conditions today have changed from those of three months ago.
Economic observer Dr Gift Mugano said it was only expected that floating of the US dollar would have some adverse effects on savings.
“It is undeniable that the floating of the exchange rate will result in erosion of savings and pensions of the ordinary Zimbabweans. For instance, if one individual had made investments in a savings account and at one point the monies had accrued to $100 000 at a rate of 1:1,” said Dr Mugano.
“Or consider one who deposited $100 000 real dollars eight years ago and now bring in the liberalised exchange of 1:4 into account one will see that the real value of the $100 000 today is now US$25 000. The same observation applies to pensioners. This was again one of my reservations on floating.
“With this experience where economic agents have lost their pension twice in a 10-year period will discourage savings which are key for driving investment and economic growth.”
At a broader level, February’s Monetary Policy is likely to have a longer term effect on insurance and pension funds as a number of these have funds invested on the Zimbabwe Stock Exchange (ZSE).
In a fearful sign the ZSE hit a bearish trend as a number of stocks lost value.
The bearish trend began soon after the announcement of the Monetary Policy Statement by the Reserve Bank of Zimbabwe (RBZ) governor last month, which is perhaps indicative that (foreign) investors have taken guidance from the policy shifts.
The year-to-date loss stood at 17,57 percent.
The ZSE’s market capitalisation has dropped by 6 percent to RTGS$15,8 billion around mid-March from highs of around RTGS$19 billion recorded at the beginning of 2019.
Zimbabwe has been struggling with foreign currency shortages and exchange issues over the past few years as forex trading was dominated by black market trades due to the lack of an official forex trading market.
The resultant loss of monetary value led to investors to hedge their monies on the ZSE as a means to protect value.
However, with the introduction an inter-bank foreign currency exchange platform in February, investors are likely to have taken cues on the long-term.
“Stocks (had) became a safe haven for value preservation at a time when property (another value preservation strategy) was now quoted in USD, which was beyond the reach of most institutionals,” said market analysts Akribos Research Services in a recent note.
“In our view, the establishment of the interbank exchange market (hence the falling away of 1:1) and the introduction of the RTGS$ as the base currency of Zimbabwe during the 2019 Monetary Policy Statement gave further clarity to investors regarding the sticking currency issue.
“We have seen selling pressure from foreign investors in the major stocks (Delta, Econet, Cassava, Innscor), to buy into Old Mutual.”
To the extent that such a bearish trend is sustained, insurance and pension companies invested on the local bourse may find themselves taking a significant hit on their invested funds, which ultimately comes back to affect the simple pensioner or insurance policyholder.
Meanwhile, the RBZ says it has been supporting some pension companies in the country to preserve the value of their funds in United States dollars.
As at the end of the second quarter of last year, the pensions industry had six life offices insuring 860 pension funds.
In view of the Monetary Policy Statement, there has been growing concerns that pensioners’ savings would be eroded after the banking regulator earlier this year moved to liberalise the United States dollar exchange rate by introducing an inter-bank market.
But, the RBZ governor Dr John Mangudya said the bank has assisted several pension firms to preserve the value of their funds in US dollars.
“We have assisted some of the pension firms in this country to purchase what we call deposit receipts in foreign currency so as to preserve the value for their funds for the pensioners, and that is at our expense not their expense,” he said.
But the real question is how many firms within the insurance and pensions sector are getting this kind of support, and even if they are, is it sustainable in the long-run?
The issue of maintaining the value of pension funds is particularly relevant, especially after concerns were raised on how pension companies converted pension benefits from the Zimbabwe dollar to the United States dollar following the dollarisation of the economy in early 2009.
Numerous pensioners found their contributions eroded overnight and they were paid paltry rewards by the pension funds as the pension companies claimed that the pensioners’ contributions had been wiped out during the hyperinflation period.
