Inability to reduce the value of financial commitments denominated in domestic currency via a large exchange rate depreciation or through fueling inflation may be considered as the major cost the government suffered through dollarisation.
Now that we have officially re-introduced our own currency, the dynamics in the monetary sector of the economy have totally shifted. Since the pronouncement of Statutory Instrument (SI) 142, the local currency has depreciated at a faster pace in the formal economy with the rate now above that of the parallel market rate. It is a sign that the Reserve Bank of Zimbabwe (RBZ) has indeed removed the cap and controls on the interbank market. This may also mean that the new currency is already being discounted in the formal market which calls for greater oversight.
In banking, its normal to see treasury dealers taking positions and making money when wind-off these positions.
However, banks are generally not allowed to take positions on currency. Whatever banks buy in the currency market should be sold within the same day and banks have to report daily to the central bank on who they bought that currency from and also who they sold to. This raises some questions on whether this regulation is being enforced by the RBZ or not. If it is being enforced, then it raises further questions on why banks are taking such pricing.
Banks can only act in such a manner if they are sure of liquidating those positions profitably in a day.
Of importance is that, a bank can only buy up to US$100 000 as float. Beyond that, the bank will need to have a customer already in place to buy that amount. They cannot purchase a currency for their book or to hold because that results in market manipulation which is a serious offence. The same applies to bureaus de change and any registered money changer. Given the developments in the monetary sector over the past years, there is high possibility that the RBZ has not been enforcing the regulation. As such, banks may be violating this requirement of not taking positions on currency. This calls for the RBZ to be more active in monitoring banks’ behavior especially during these infancy stages of currency reintroduction. Indeed, investment banks can take currency position but commercial banks are not allowed. Currently, there is no bank classified as an investment bank in Zimbabwe. When banks take positions on currency, they can manipulate the market, they also put depositors’ funds at risk.
However, the RBZ also plans to print $400 million in local money and inject it in the economy. This is a welcome development given the huge gap in the market in terms of supply of paper notes and coins. However, the authorities have to be extremely cautious as the injection of more money may turn out to be inflationary. Currency has to be backed by production or sufficient reserves and injection of more currency without any backing will tend to be inflationary. Attainment of a smooth transition to having own currency generally should go alongside a well-organised and realistic government development program that focuses on increased productivity in the real sector to enhance wide range economic diversification. Rapid loss of value of the new currency in the formal market in part points to a rushed policy and low productivity in the real sector. A local currency is important, but it is worth noting that Zimbabwe is a high import dependent economy, with a balance of payment position that appears to be deteriorating year on year. This basically means the economy is buying practically more goods and services from abroad than it is selling abroad. This implies that no matter what currency in use, there will be always pressure for foreign currency as long as domestic productivity remains low. Late Liberia’s President William VS Tubman once said “he (Tubman) could not switch from the US dollar to a local currency because he did not trust himself”, meaning he did not trust himself not to yield to the temptation of printing money in order for the government to spend money that it did not have. Zimbabwe authorities, hopefully, have learnt their lesson well and they now “trust” themselves.
Tinashe Kaduwo is a researcher and economist — firstname.lastname@example.org