Liberalise the exchange rate: Imara

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GOVERNMENT must walk the talk and provide clear evidence that it is reforming both economically and politically if it is to get fresh funding from multi-lateral financiers, an asset management firm has said.

Melody Chikono

Earlier this month, Reserve Bank of Zimbabwe governor John Mangudya presented his monetary policy statement whose salient features were the introduction of US dollar nostro foreign currency accounts (FCAs) that would run parallel to Real-Time Gross Settlement FCAs, which effectively suggested that government had officially admitted that the two accounts are different.

Imara Asset Management Zimbabwe says authorities should now allow banks and the private sector to trade between the two FCA accounts, thereby formalising an exchange rate between RTGS and US dollar benchmarked by the free market.

Imara CE John Legat said that President Emmerson Mnangagwa’s administration should debunk the myth that the greenback is trading at par with bond notes and RTGS. Monthly economic bulletins published by the RBZ show that actual US dollar held by the banking system in nostros and cash amount to around 20% of cumulative deposits.

Legat said a rate of five RTGS dollars to a US dollar would be about right on a worst case scenario, in part because those numbers exclude any foreign currency that might be held outside of the banks and under mattresses or in the informal sector.

He said interest rates on the two accounts also needs to be liberalised with higher rates being offered for RTGS accounts versus US dollar rates.

“This could result in the RTGS dollar strengthening against the US dollar, thereby halting the slide. Critical to RTGS dollar stability though will be the immediate cessation of RTGS dollar creation in order to fund government expenditure. Over time, as confidence grows in the government and the monetary authorities, then that rate could converge further with the US dollar,” Legat said

While some semblance of confidence will only come when government implements its stated economic reforms, key of which is to run a balanced budget and cease creating RTGS dollar, Legat said it was also imperative for Zimbabwe to extinguish its US$7,4 billion external debt stock. International financial institutions (IFIs) say they are ready to resume extending credit to Zimbabwe once the southern African country clears its arrears.

However, conflicting signals from Finance minister Mthuli Ncube while he was in Bali suggesting that nostro accounts and RTGS dollar accounts would trade equally destabilise the market, Legat said.

At Chatham House in London recently, Ncube appeared to agree that the value of an RTGS dollar was different from the US dollar.

However, when the black market exchange rate collapsed while in Bali Ncube then suggested that Afreximbank would underwrite RTGS dollar balances equally.

“Since we do not believe that an RTGS dollar or another local currency would be sustainable for the reasons previously given, it remains our view as outlined in our July 2018 Investment Notes, that the easiest solution, should Zimbabwe be allowed to do so, would be to join the Rand Monetary Union (RMA) by converting all domestic debts, Treasury Bills and deposits, prices and wages into rand at or near to a market-determined RTGS dollar exchange rate. For example, a two RTGS dollar to US$1 would crystalise a 50% haircut and would make Zimbabwe broadly competitive again with South Africa and our neighbours. That would imply a rate of one RTGS dollar to ZAR7,” Legat said.

“Put another way, all wages, prices, share prices, deposits as well as all local debt would be multiplied by seven to bring about a redenomination in rand.”

Whether Zimbabwe adopts the rand, or the US dollar (again) or any other currency for that matter, Legat said this would require the government to run a cash-budget as was the case when the southern African country dollarised in 2009, albeit without the blessing of the US.

This means government could only spend what it receives in tax revenue and hence its budget deficit would be zero.

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