Harare – The liberalization of foreign currency exchange through the return of interbank trading was the headline of the long-awaited Monetary Policy Statement (MPS). The incoming foreign currency exchange system is expected to give impetus to the country’s economic recovery drive. The great hope behind the move is that the auctioning platform will improve foreign currency access for the private sector and reduce the burden on the government to act as support. As foreign currency shortages have been a growing problem for the economy, it is useful to consider the consequences of this development and perhaps delve briefly into the past to get a view of how the process may play out.

The implementation of the exchange itself is clearly not a solution, in the context of the forex shortages and the subsequent inflationary pressures. Whether it will succeed in its primary objective of improving accessibility is not entirely clear as it is debatable if there is actually is enough forex in circulation to allow the system to operate self-sufficiently in the short term. Nostro FCA’s account for $673.8 million of account balances against $9.5 billion in RTGS FCAs.  Aware of this situation the RBZ has moved to secure lines of credit to allow banks to purchase foreign currency to start off. Export revenues from the upcoming March tobacco marketing season might improve the forex stock as the crop generated a reported $700 million in export earnings.

The big question of if the exchange can sustainably draw foreign currency in the long term ultimately hinges on the ongoing economic recovery efforts. In the short term, expectations follow that the supply demand dynamics will initially place upward pressure on the exchange rate. Hopefully, in the meantime the foreign currency that is dispersed on the market is utilized efficiently for forex generating purposes that will gradually balance the market and ease the pressure on the “RTGS dollars”. Time will tell if this process will fall in line with the RBZ assertion that the inflation rate will stabilize by October and start trending downwards.

The market trading opened on Friday at a rate of 1:2.5 with reports varied about the exact volumes transacted. The official rate places the RTGS Dollars at the top of African currencies. The implication of the valuation going forward is to diminish the competitiveness of local export production. Considering the cold international sentiment surrounding the country, the RTGS Dollar’s standing against potential regional trade partners, Namibia, Zambia and Botswana is an obstacle to exploiting close alternative export markets.

The implications for South African trade relations are particularly important.  The neighboring country is Zimbabwe’s biggest trade partner on both fronts, accounting for the majority of both imports and exports. The present exchange rate valuation relative to the South African Rand (ZAR) stands to reinforce the negative trade balance. Beyond bilateral trade implications, South Africa’s similar resource endowment has to be factored in to the exchange rate targeting going forward. The country is effectively a competitor in the global trade context hence the importance of export competitiveness relative to the Rand.

Meanwhile, the parallel markets remained stable, in light of the new developments the rates quoted in the parallel markets stayed hovering around the 1:3.5 range. The misalignment of the rates moving forward is a cause for concern, although expectations are that the rate will depreciate as trading picks up. Over the long term the two rates have to reach a relative convergence. If the RBZ opts undercut the parallel rates, as appears to be the case, then it is matter of how long the market can be sustained at that rate and how well it can supply the economy at large. This rests on how well stocked the exchange market can remain in forex terms, as well the regulatory oversight needed ensure the forex is distributed accordingly to prevent leakages to the parallel markets. 

The exchange market will face an uphill task to grapple control of the exchange rate away from the black markets. The demand for forex in the formalized exchange market will probably be dominated by large business and corporates. Conversely, the prevailing informal market set up has worked strongly in favor of the informal economy and has seen it grow to become a major economic contributor, estimated at 48% of GDP.  Hence the need for several small scale bureaux de change to service the informal sector. However, the probable short supply of forex will naturally disadvantage the smaller scale participants in the market. Moving forward, the RBZ has to ensure there is sufficient foreign currency flowing to the smaller economic participants because the ensuing excess forex demand will continue to feed into black market activity.

The MPS also saw the RBZ revise its forex retention policies for key economic sectors. The manufacturing, horticulture, transport and tourism related export revenue earners attract 80% retentions. While the mining exporters saw moderate increases in retentions with gold producers rising to 55% from 30% and all other mineral retentions rising to 50%. Tobacco and cotton export growers saw retentions rise to 30%, from 20% while merchants’ retentions were fixed at 80%. All these are arguable positive developments, in terms of easing pressure on the exporters. The fact that export revenue contributed 68% ($4.2 billion) of total foreign currency receipts in 2018 highlights the importance of sustaining export related operations.

The revised retentions come in tandem with an additional policy that the foreign currency holdings must be utilized within 30 days or else they will be disposed at the prevailing market rate. A somewhat ominous policy that signals the RBZ’s concerns about keeping the exchange well lubricated. On the plus side, it might prompt more capacity building capital expenditure from exporters or a more pessimistic view that the move will encourage exporters to externalize foreign currency holdings.

The reduction in forex inflows for the government does strain their goal to build up reserves as part of the long-term goal to ultimately reintroduce a domestic currency. On this, the government is now seemingly prioritizing the operating health of exporters, which is a positive development in the long-term context of achieving the macroeconomic stability necessary for the currency reintroduction goal. Though curiously, the government has also maintained that it will continue to support the forex needs for the procurement of select essential commodities despite the probable decline in surrendered forex inflows.

It is useful to note that neither currency devaluations nor formalized currency exchange platforms are not radically new measures in what has been a perpetual battle against inflation. At the turn of the century, under then Minister of Finance Simbarashe Makoni, the prevailing fixed exchange rate was devalued under mounting pressure from parallel rates. Fast forward to 2004, the RBZ under Governor Gideon Gono implemented a managed foreign exchange auction system under similarly mounting inflation and exchange rate pressures. A year later, with the system failing, the government implemented a dual exchange system that involved an interbank rate for market transactions and an official rate for government transactions.

Needless to say, the measures failed to rectify the issues they intended to address. In all cases, the measures failed because they were not accompanied by supporting policies in fiscal and monetary supply management. It is worth noting this was a time were the government generally relied on money printing to offset the declining economic activity, with the inevitable consequences. Hence, perhaps monetary policy was always doomed to fail on that basis. 

Moving forward to now, the surrounding circumstances are different to a degree, with the country’s currency status effectively occupying a sort of grey area. However, regardless of the technicalities about the status of the RTGS money, the MPS has effectively rendered it an unofficial official currency. Consequently, it has also created a strong parallel with the previous scenarios faced in the desire to protect the value of an under-fire currency as a means to abate inflation.

The statement that the RBZ intends to “aggressively” intervene in the market to contain exchange rate and inflationary pressures is troubling in that context. More so since this statement was not detailed in how exactly it plans to do so. Without any disclosures regarding reserve levels, aside from noting the objective rebuild them, it is unclear how they will support the exchange rate sustainably. The commitment adds further emphasis on the need for the sort of disciplined monetary supply management that has for the most part eluded the RBZ. The statistics provided in the MPS offer some encouragement, as money supply growth decelerated towards the close of 2018 from a peak of 50% down to 25% per annum growth

Arguably, the success of the foreign exchange will rest on a multitude of related factors. Chief among them is how well the fiscal austerity and money creation restrictions will hold against the socio-economic pressures that will inevitably arise. In this sense, the capacity of the RBZ to act independently and sterilize monetary policy from political pressure will be crucial. This will then dictate how the RBZ will interact with the foreign exchange markets.

Ideally, the bank has to adopt a facilitating role, away from the heavy-handed dictating approach of the past. This is important, as the present current account deficit and import dependency of the economy will inevitably place significant pressure on the sustainability of the foreign exchange market. The RBZ’s approach to dealing with this situation will be important in the short and long term. The market will inevitably need to be routinely shored up in the short term. While export growth and import substitution will be paramount to the long-term stability of the market. However, the prospect rests on the foreign exchange markets ability to supply the economy’s foreign currency needs in the short term. Hence, the RBZ has a tough balancing act in spreading forex inflows effectively between supporting the foreign exchange and targeted commodities in the short term, while rebuilding reserves for the long term.

Evidently, beyond the technical formalities the MPS has to be supported by strong policy coordination at government and industrial levels. Ultimately, the Bank has to be insulated from knee jerk reactions to economic and social shocks. In the past the compromised independence of the Bank lent itself to the irresponsible practices that led to the present circumstances, failure to address that issue will more than likely see the cycle repeating itself.

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