‘Floating currency alone not sufficient’

THE Reserve Bank of Zimbabwe (RBZ) and analysts agree that the recent introduction of a battery of measures to stabilise the foreign exchange market and commodity prices by the central bank would not alone solve the country’s economic challenges.
This comes as experts have also warned that demand for hard cash in the country is likely to remain high in the foreseeable future — with Zimbabwe’s external payment backlog still at US$600 million.
And with banks having traded not much more than RTGS$5 million at last week’s currency auctions — against an aggregate monthly demand of RTGS$200 million-plus — concerns about the adequacy of the new policy measures are not unfounded.
“Companies need to boost production because the floating of the US dollar alone will not, for example, enhance productivity in the country,” bank governor John Mangudya told a local daily last week.
“We will arrange foreign lines of credit since demand will be greater than the supply of foreign currency. We need to cloud seed the market with foreign currency,” he said.
Chris Mugaga, the Zimbabwe National Chamber of Commerce (ZNCC) chief executive, said the 30-day maximum retention period for foreign currency earnings, was also potentially problematic.
“The retention window should be pushed to 90 days, as 30 days is too tight. And because the interbank market for foreign currency has just been introduced, it will probably be volatile initially, and there needs to be a cushion for exporters,” he said.
“With the current arrangement, we might thus have exporters looking for havens outside of the system,” Mugaga said, adding that “and if they go to the grey market, then we will be defeating the very purpose of the interbank market”.
Nick Ndiritu, a money manager at Allan Gray, concurred saying: “Once the dust settles … the long-term success of any currency reforms in Zimbabwe depends on the extent to which government can curb the growth of money supply and maintain fiscal discipline”.
“It is too early to tell how this new system will work, but it is an important step in the right direction,” he added.
“Given the persistent mismatch between demand and supply of foreign currency, and the lack of foreign reserves among other factors, the weakest link remains the ability to sustain a stable market-determined exchange rate,” banking group BancABC said in an advisory note last week.
It added that “in the event that the exchange rate remains under persistent depreciation pressure, the economy may gravitate towards hyperinflation, leading to abandonment of RTGS dollars while speeding up the pace of re-dollarisation”.
Economist Trust Chikohora said: “Demand for foreign currency will remain high and the rate could move upwards if the supply side … is not addressed”.
“I still advocate for us to do away with the bond note and trade in forex for now until economic fundamentals are right because the RTGS dollar is likely to continue losing value, resulting in inflationary pressures, and distortions,” he added.
On the currency retention thresholds, Chikohora said “exporters will still need to surrender a portion of their forex to the RBZ at 1:1, meaning that although exporters will now get more value for their money, they will still not get full value”.
On his part, veteran economist John Robertson said if exports were properly supported, foreign reserves would improve markedly and to such an extent that government would allow 100 percent retention for exporters.
“Exporters have the answers to all our problems and government has to make life as easy as possible for them,” he said.
“Right now, every exporter faces a mountain of regulations and the need for so many permits, all costing money, and so much so that some have even given up trying to find foreign markets,” Robertson told The Financial Gazette.
He also said the two percent transaction tax was adding to production costs, making local goods less competitive in foreign markets.
Brains Muchemwa, another economist, said while the move by the RBZ towards “a full float” was commendable, a corresponding rise in interest rates and reserve thresholds, to further shore up fiscal prudence, would help to anchor the exchange rate.
“While the tight liquidity conditions will undoubtedly slow down economic growth in the medium term, it is still the best foot forward towards creating a stable and predictable macro-economic environment,” he said.
The Oxlink Capital founder also said under the current economic environment, the only way to protect the value of the RTGS dollar was through a free-floating rate.
Muchemwa emphasised that exports needed to improve to ensure an adequate supply of US dollars.
Adrian Cloete, a portfolio manager at Cape Town-based PSG Wealth, said South African companies with significant holdings in bond notes valued at par with the greenback would be hard hit by the new monetary measures.
“Those South African companies … when preparing their statements, would be impacted as they would have to translate now at a different rate,” he said.
In this light, South African Airways — which has nearly R1 billion stuck in Zimbabwe — had since imposed strict ticketing conditions in response to the new measures.
Old Mutual Securities (OMSEC) also said a lot more needed to be done to fix the economy, including enforcing fiscal discipline in government.
“The effectiveness of a foreign currency market and sustainability of the new RTGS dollar will be largely determined by the ability of the government of Zimbabwe to cut back on its deficit-financed expenditure activities.
“The second pillar … of this policy is ensuring that the export industries’ operating environment is conducive for competitive commercial enterprise,” OMSEC said, adding that “any market distortion over the interbank market rate could cause foreign currency supply constraint bottlenecks and the consequent unviability of the interbank foreign currency market”.
Research firm Akribos Capital said the success of the interbank foreign currency system was likely to “reduce” parallel market trading, as corporates shifted to the formal market.
“The major point of concern was financial dis-intermediation, given that foreign exchange transactions were being done in the parallel or alternative market, and there was limited activity in formal banking channels,” it said this week.
However, Akribos also said the parallel market would not “fade away” completely, given that it remained a key source of foreign currency for individuals and informal businesses.
On Friday last week, Finance minister Mthuli Ncube told a Daily News breakfast meeting that the 1:1 policy had cost the economy and the State billions.
Gift Mugano, another economist, also said the 1:1 rate had created several problems, including corruption and other arbitrage opportunities emanating from the inherent distortions.
He said by liberalising the exchange rate, the RBZ had thus wiped out the possibilities of such grey activities.
“By floating the change rate, the competitiveness of exporting sectors is expected to significantly improve,” he said.
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