The major changes in monetary policy made last week are taking time to work their way through the systems and into the intellectual consciousness of Zimbabweans with many taking time to absorb the changes and think their way through the implications.
For a start there have been questions over the starting ratio of 2.5 RTGS dollars for one US dollar. But when you think about it this ratio was logical. What the changes last week did was combine the two major pools of foreign currency, in fact all the currency from exports. About half of the export earnings, including gold, were retained by the exporters and about half ended up with the Reserve Bank of Zimbabwe. There were two rates in fact, if not in theory. The export-retention pool was valued at roughly 4 RTGS dollars to the US dollar while the RBZ pool was valued at 1-1. When you combine the two a simple calculation shows that for every US$100 in the pool the old total value was RTGS$50 from the RBZ and RTGS$200 from the market, giving a combined total of RTGS$250 for US$100. So the 2,5-1 rate creates no change and was not arbitrary.
It is this joint pool that the Government and the business world will be accessing and here supply and demand are roughly constant, with flows into the market ensured by the decision to follow the practice of many other countries, including South Africa, of forcing exporters with retained export earnings to use these or sell them through the interbank market within 30 days. At the end of the 30 days anything left in a nostro account will be sold to the RBZ at that day’s rate. This stops exporters playing the currency markets and ensures, from the third week of March, a fairly regular flow from sellers. Since invoices and the like are required from those allowed this new pool, and not all purposes are approved, sudden swings are unlikely.
That 30 day limit also means it is odd that some exporters are seeking higher retention rates. A business that earns most of its income from exports cannot use cash in its business nostro account to buy goods and services in Zimbabwe or pay salaries or do anything except make foreign payments for goods and services it needs to import and choosing the day in a single month when it will sell what is left over. This is one reason for variable rates of retention. Manufacturers, at 80 percent, are almost all net importers. The retention is a slightly watered down version of the incentive scheme launched in September last year, in the previous monetary policy statement, to encourage even the most Zimbabwean-focused industrialist to think about how to earn at least some of the foreign exchange required for imported inputs. The percentage drops as the business sector moves more and more into the arena where most earnings are from exports, not the local market.
Individuals are still barred from the RBZ allocations and the interbank forex market, except for education. So cross-border traders, Zimbabweans wanting to go on holiday, people wanting to buy stuff on the internet and even people wanting to send money to their aged mother outside the country have to access the third, and much smaller pool, that of the free funds.
That is largely funded by a flow of diaspora remittances padded out with a little bit of cash from tourists wanting a cheap holiday.
While some of the funds in this market have entered the formal banking system, through pre-paid debit cards and private nostro accounts, the bulk regrettably still consists of wads of US dollar bank notes in pockets, car boots and private safes. Since this market exists without regulation, and without any questions being asked or answers given, the rates will inevitably be higher. But they should not be that much higher once the dust settles.
Already the free-fund rate has fallen around 7 percent in the first week, despite the stocks that currency “wholesalers” hold and which they bought at high prices.
The RBZ wants this market to move back into the bureaux de change and wild swings in rates held down by the limit of US$10 000 of business a day. We suspect that the move into the world of legality and light might take a bit longer, but that eventually it will succeed if for no other reason than the incredible 15 percent spread between buyers’ and sellers’ rates on street corners offers a lot of scope for the law-abiding to cut charges. Much of this spread can be thought of as “danger money”, the dealers facing the risk of fines, confiscation, robbery, and imprisonment.
The authorities, now that the RBZ has opened legal routes for currency dealing, could accelerate the decline in that portion of the free-funds market still running in the darkness by enforcing the existing laws more rigorously. The market was required, perhaps, to oil the works.
What is now required, to tame both exchange rates and inflation, is to reduce that huge pool of liquidity in the money supply. This first requires the taps being kept off by the Government retaining its determination to be fiscally conservative and prudent, and that means among other things no subsidies. Rather those producing essentials need to pay the normal exchange rate but be granted other concessions through duty rebates or the like to keep prices moderate and lower inflation.
Secondly the RBZ must, with Government backing, continue to mop up the excess liquidity. It has already pulled almost 20 percent into savings bonds of the $10 billion or so sloshing around the banking system and needs to keep up the efforts.
At the same time, as we noted last week, the fiscal authorities should be active interventionists, adjusting the huge range of taxes and rebates to help monetary authorities ensure that at least 70 percent of foreign currency goes into production, not consumption.
Moderating markets and reducing monetary supply will reduce pressure on exchange rates and prices, and that is required to make the new system work properly and the RTGS dollar to evolve steadily into the new local currency, but preferably with a simpler and more attractive name.