The Brett Chulu Column
THE eagerly anticipated Monetary Policy Statement (MPS) for 2019 was finally delivered by the Reserve Bank of Zimbabwe (RBZ) governor John Mangudya on Wednesday this week, the same day the budget statement of South Africa (SA) was being presented.
The rand fell during SA finance minister Tito Mboweni’s budget presentation by 2,27% against the United States dollar from 14,04 to 14,36, recovering to 14,07 by the end of his budget speech.
North of the Limpopo, Mangudya was delivering the 2019 MPS, effectively liberalising the forex market, setting up a willing buyer-willing-seller interbank forex market complemented by bureaux de change (to allow ordinary citizens to buy and sell forex). The RBZ has finally shed the pretence that the bond note and the RTGS dollar are at par with the greenback. The black market forex rates did not immediately react to the news, with the rate for the bond note steady at 3,4 to the dollar. The jury is still out on whether the MPS has done much to restore confidence in the economy to bring down forex rates drastically, potentially dealing a mortal blow to the roaring black market for forex.
Mangudya consolidated the quasi-currencies under one name, the RTGS dollar, effectively killing the bond note. He had no other viable option given that US$85 billion of RTGS transactions, US$44 billion worth of mobile phone transactions and US$13 billion internet transactions dominated payments in 2018.
The consolidation move is a stratagem to try and kill the practice of rating bond notes and RTGS balances differently, allowing for a single rate for the RTGS dollar. This might work given that the RBZ will require the formal forex market dealers (banks and bureau de change) to submit forex trade data on a daily basis.
The key argument advanced in this article is that the RTGS dollar should gain against the US dollar and trade at around 1,6 to the US dollar. The table accompanying this article clearly shows that the fundamental that should drive the RTGS dollar rate is forex receipts, imports demand and broad money supply. The extent to which broad money supply proportionately exceeds forex receipts should roughly be the premium for the US dollar over the RTGS dollar.
In 2016, the year the bond note was introduced, broad money supply closed the year at US$5,638 billion, with total forex receipts for the year totalling U$5,408 billion. This implied that, on average, only 4% of broad money supply was not supported by hard forex. It is fact that between May 5 and December 31 2016, the black market discount for the bond note to the US dollar was about 5% and that of RTGS balances was trading at a discount of about 10% (mainly due to the market at the time having more confidence in the hard bond currency as opposed to the electronic RTGS balance). As government ramped up its spending beyond the budget, forcing it to borrow heavily from the domestic market to finance a huge and unsustainable budget deficit, more electronic dollars were printed, causing broad money supply to significantly exceed total forex receipts. Imports for 2016 amounted to US$5,236 billion, implying that 8% of the forex supply to meet import requirements was met from informal sources, tracking closely the US dollar premium for 2016.
In 2017, broad money supply jumped 43,8% to US$8,106 billion, meaning 46% of money held in the banking system was unsupported by hard forex. In that same year, imports stood at US$5,593 billion, implying that 45% of the imports were funded outside the formal market, roughly corresponding to the average US dollar premium for 2017.
Mangudya, in the very introduction to the MPS, remarked that: “The foreign exchange premiums on the parallel market which ranged from 1,40 to 1,80 to the US dollar in September 2018 increased to the current levels of between 3,00 and 4,00.”
The 40% premium Mangudya mentions is close to the implied 46% average US dollar premium for 2017. Import demand for 2018 was about US$6,4 billion, implying that 57% of forex needs for imports were being met by the informal market. This clearly shows that the market was pricing the bond note and the RTGS dollar primarily on the basis of supply and demand dynamics for forex.
The climbing of the premiums above 100% after October 1 2018, following the announcement of the separation of bank accounts into RTGS and foreign currency nostro had nothing to do with forex demand and supply forces; it was wholly due to a disproportionate loss of confidence. That the informal forex market premiums have shot and remained elevated at between 200% and 300% shows confidence has been seriously eroded. As much as between 140% and 240% of the premium component of the pre-MPS forex rates is an unnecessary confidence-deficit premium.
Going forward, this is going to be the real test of whether overall government economic policies will be considered credible enough to inspire confidence. The RTGS dollar discount is now the daily referendum on government economic policy. The fundamentals of demand and supply of forex and a slowdown in money supply growth point to a 60% premium of the US dollar over the RTGS dollar. The forex retention thresholds are better than what used to obtain — the RBZ has conceded significant ground and let go of its strong impetus to grab the chunk of forex generated by exporters.
Understandably, the RBZ needs to retain some forex in order to build the necessary forex reserves, at least four months’ supply of imports cover, to support the envisaged new currency. The RBZ’s requirement that exporters keep their export retentions for up to a month, failure which RBZ will forcibly buy the forex at the ruling interbank forex market rate, though serving to RBZ’s self-interests, will go a long way in contributing towards availability of forex in the formal forex market. Limiting bureaux de change to dispensing a maximum of US$10 000 per day may mean that the black market may continue to thrive, given that our informal sector constitutes about 70% of the economy, but with much reduced premiums.
There is a caveat to my argument that the US dollar forex premium should come down to about 60%. The RBZ did not mention how they will fund the purchase of the forex they will retain from exporters. Furthermore, it is not clear if the RBZ will purchase this forex at the free float price. This might mean that the RBZ will allow for an increase in money supply to have at least US$1,5 billion of RTGS dollars to participate in the free formal forex market. Money supply will mean forex premiums soar above 100%.
We did not have a forex shortage problem — we had a forex misallocation and confidence deficit problem.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — email@example.com