Free funds and tacit re-dollarisation

THE Zimbabwean government has made another tacit admission on losing the de-dollarisation war to the market by gazetting Statutory Instrument (SI) 85 of 2020 which allows citizens to use foreign currencies for buying goods and services in the local market. In the midst of coronavirus interventions, the central bank also fixed the interbank exchange rate at US$1 to ZW$25 for an indefinite period.

Victor Bhoroma analyst

This comes barely one month after the Reserve Bank of Zimbabwe (RBZ) indicated in its monitory policy that de-dollarisation was on course and that it would take five years for it to bear fruit. SI 85 of 2020 comes two weeks after Treasury announced that the country’s interbank market would use an efficient Reuters system and move to a managed floating exchange rate, while clearly stating that the central bank’s role was now limited to monitoring (and intervening only when necessary).

The recent pronouncements are again in plain contradiction of the regulations contained in SI 142 of 2019 and other related exchange control directives that outlawed the use of foreign currencies on the local market.

The recent announcements from Treasury and the central bank point to apparent discord (misalignment) between Zimbabwe’s monetary policy and fiscal policy in the last two years. Treasury called for a managed floating exchange rate where commercial banks would be market makers and the Reuters system was put on trial for close to 10 days from March 16 to March 26, 2020. This resulted in the inevitable depreciation of the Zimbabwean dollar rate on the interbank from Zw$18,39 to ZW$26,11 for US$1. Treasury directed the central bank to terminate the gold incentive to local producers, to report all foreign currency inflows to the treasury and to channel all surplus foreign currency onto the interbank on a daily/weekly basis.

So far the central bank has gone the opposite direction by fixing the exchange rate, introducing new incentives of up to 26% for gold deliveries exceeding 25 kilogrammes per week and not reporting foreign currency receipts on a daily/weekly basis. Fixing the exchange rate at 1:25, allows the central bank to pay exporters (especially miners and tobacco farmers) less than the open market rate for retained export earnings while giving privileged importers (especially fuel, wheat, grain and soya importers) a sub-market rate to import those commodities. The fixed exchange rate will negatively impact liquidity on the interbank market where demand for foreign currency outstripped supply by more than US$5,5 billion in 2019.

Besides the unsustainably high demand for foreign currency by local producers as highlighted above, the de-dollarisation policy is failing to take off due to underlying structural, fiscal and governance constraints bedeviling the country. These constraints negatively impact on production capacity, market confidence on government policies, investment (both domestic and foreign), accessing to loans from bilateral institutions and fiscal balance.

This is compounded by lack of foreign currency reserves to back the Zimbabwean dollar and high levels of unserviced sovereign debt amount to over US$8,5 billion.

Impact of a fixed exchange rate

The free funds term is just hidden language to the public to use their foreign currency openly for local transactions as its meaning includes any form of foreign money or funds earned by an entity or individual.

Initially, free funds referred to foreign currency received by individuals and various organisations through formal remittances, funds held by non-governmental organisations (NGOs) and embassies and offshore grants or loans. The exemption to use free funds on payments of all goods and services allows local producers and retailers leeway to openly practice multi-tier pricing even though consumers will continue to channel their free funds to the black market which offers higher rates than the stipulated 25.

The unintended consequence is that there will be a massive flow of foreign currency to retailers that will use the black market rate to accept payments in foreign currency especially cash and cash tuck-shops, informal traders and the rest of the retailers that are not under close surveillance from law enforcement agents. Massive tax evasion and informalisation will pursue with key manufacturers in fast-moving consumer goods channeling produce to informal traders’ quick gains. Resentment from miners and tobacco farmers is unavoidable in the near future.

Selective indexing by retailers

A number of retailers will slowly price their highly demanded merchandise exclusively in foreign currency while testing the government’s resolve on the Zimbabwean dollar. This is already happening in auto spares, real estate, transport sector and pharmaceutical retailing. If no measures are taken to curb this, the pioneers will migrate to total foreign currency. This will put a lot of pressure on the government to remunerate its restive 400 000-plus civil service partly in foreign currency and partly in local currency. Already demands have reached the boiling point for such a scheme.

Changes in taxation

The government has been using the Finance Act of 2009 to collect taxes (Import duty, VAT, royalties and payroll tax) in foreign currency especially from importers of selected luxury commodities, miners, tourism and hospitality and petroleum sector.

In as much as the directive to use free funds was deliberately targeted to consumers, it also empowered producers and retailers to have parallel US Dollar prices to accept payment from the affected consumers. This means that the government will likely follow through and demand taxes from the same producers in the currency of trading. This will signal the quiet demise of SI 142 of 2019.

Dual monetary economy

The government is very happy to maintain a dual monetary economy in order to support various subsidies, get cheap foreign currency to repay foreign debt, receive part of its tax revenues in foreign currency while paying its dues in Zimbabwean dollar and above all have the ability to print money to support the export retention policy.

All these benefits have immense political benefits that the government justifies economically despite the harm caused by printing money on local incomes and business viability. The dual monetary economy is likely to be maintained right through to 2023 or beyond.

The local economy is partially dollarised and there is no way back in terms of the utilisation of the so-called free funds by consumers. However, it is imperative for the government to at least exercise restraint on money printing to save incomes for citizens who receive their remuneration in local currency. Inflation for March will eclipse 600% and demand for foreign currency will remain relatively high despite the impact of coronavirus induced lockdowns.

Policy inconsistency has been an Achilles heel for the government and the use of statutory instruments have brought more confusion on the market instead of policy clarity. The market hopes for pragmatism in policy announcements (instead of political posturing) and market determined exchange rates that can allow miners, tobacco farmers and other exporters to realize fair value for their businesses. Re-dollarisation is quite welcome for the hard-pressed citizens and businesses, however a lot of market distortions still exist because of government subsidies to selected producers.

The impact of using free funds will yield limited economic benefits if billions of Zimbabwean dollars are consistently pumped into the economy to monetise budget deficits or support unsustainable import subsidies. The central bank cannot expect currency stability on one end while fixing the interbank rate, maintaining export retention thresholds and playing a limited role in oiling the interbank market, on the other hand.

Bhoroma is a marketer by profession, freelance economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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