Evaluating the RBZ’s mid-term policy

THE mid-term monetary policy was delivered on August 21, 2020, by the Reserve Bank of Zimbabwe (RBZ) with an urgent need to support the recently launched Foreign Exchange Auction System and stabilise prices in the market. Incessant price increases have seen a steep rise in annual inflation rate from 737% in June to 838% in July.

Victor Bhoroma

As a result, the consumer basket of six has increased from ZW$13 026.17 in June to ZW$14 256.98 in July. The latest increase in prices being a direct result of upward adjustments of fuel pump prices, which are now widely indexed in US dollars. To the credit of the central bank, the auction system has brought a measure of exchange rate stability which, if sustained, and decentralised can bring about the much-needed efficiency in the foreign exchange market.

There are still a number of challenges to be managed such as the actual supply of foreign currency by exporters and foreign currency account (FCA) holders, low market confidence and rejection of the local currency by certain economic agents in the market.

So far, the auction system is far from being market determined, with the exchange rate reflecting more of the crawling peg that the central bank envisaged at the beginning of the year. The central bank will certainly aim to see the rate decline from the current US$1:ZW$83 so as to manage broad money supply growth. It is, however, key to point that the decline in reserve money from ZW$16,66 billion as of July 31 to ZW$11,81 billion as of August 14 has played a significant role in curbing the freefall of the Zimbabwean dollar.

The effect has been felt on the parallel market where the exchange rate has maintained at around US$1: ZW$100 for the past three weeks. It is worth noting that the exchange rate does not need to be high to be genuine, it simply needs to be stable long enough to foster price stability and improve market confidence.

Mobile money changes

There is no doubt that there were weaknesses on the mobile money ecosystems in terms of anti-money laundering controls, strict adherence to Know-Your-Customer (KYC) regulations and failures to verify identification details for mobile money users at various levels. The huge demand for mobile money services, record transaction volumes and values made it a nightmare for mobile money operators to effectively close the above loopholes.

As a result, the central bank moved to ban agent and bulk payment facilities. Mobile money agents had deviated from their authorised cash in and cash out services to illegal foreign exchange and cash swap dealings. Similarly, merchant accounts will now be used to receive payments from customers only, with the latter now capped to a maximum transaction value of ZW$5 000 per day.

The central bank also directed mobile money operators to close multiple wallets and leave a single wallet per individual. The changes will definitely bring sanity to the market in terms of illegal foreign currency trading and other Illicit Financial Flows (IFFs). The liquidation of merchant proceeds to bank accounts and payment of bulk disbursements such as salaries through the banking system will curb the rapid informalisation that is growing in the economy. In the coming months, banks will realise a significant growth in their deposits with billions being liquidated by super merchants such as large retailers, manufacturers and service providers.

The Zimbabwean dollar proceeds will now circulate in the market and compete for the foreign currency available on the formal auction system instead of the parallel market as was the case. The government can therefore expect to have better visibility of the national payment system for its taxation purposes. The ZW$5 000 transaction limit per day for mobile money customers may soon be overtaken by events if the Zimbabwean dollar plunges further, therefore the central bank would need to review it from time to time to sustain the prevailing cash lite ecosystem.

Export retention review

The central bank moved to standardise the export retention threshold by all exporters to 70% across all sectors in the economy.

This will come as sweet news to the ears of the toiling tobacco farmers who were not happy with the preceding retention scheme. Previously tobacco farmers could only retain 50% of their foreign currency earnings at the Tobacco Auction Floors and this was beginning to take a toll on the auction floors operations as contractors took over. Exporters in other sectors, such as manufacturing, agriculture (apart from tobacco farming), transport and service industries previously had a slight advantage as they could retain 80% of their export proceeds. Further, the 30-day liquidation period of unused foreign earnings has been reviewed upwards to 60 days from the day of receipt.

Exporters were proposing a 90-day period in line with other countries such as Mozambique and Zambia to enable them to better manage their cash flows. The monetary policy therefore brought slight relief to exporters as they can now observe the movements on the auction market without being forced to make offshore prepayments and rushed liquidations where they made exchange losses.

Foreign Currency liquidation

In order to provide liquidity to the auction system and sustain its operations, 20% of the foreign currency generated by domestic businesses will now be liquidated at the point of depositing into the local FCA account. The policy change will however not affect the existing FCA balances which boast of over US$1,2 billion dollars.

The measure shall also not affect holders of free funds, including diaspora remittance recipients, embassies, Non-Governmental Organisations (NGOs), tobacco and cotton farmers and domestic FCAs for petroleum companies. The latest changes might deter local businesses from freely depositing their foreign currency proceeds or force those that cannot conceal their foreign currency dealings to marginally increase their US dollar prices to take care of the exchange rate gap between the auction rate and the parallel market rate.

The central bank highlighted that FCA balances with local banks have grown from US$352,4 million as of January 2020 to US$404,8 million as of July 2020. The balances will gradually increase as the US dollar circulation in the economy improves.

Bureaux de Change spreads

The central bank continued with its onslaught on the parallel market activities by increasing the exchange rate spread for Bureaux de Change houses from the current 3,5% to 5% above the auction rate.

The bureaux de change houses will now be required to sell 80% of their balances on every Monday to the auction market using their reserve prices. This will allow them to offer competition to parallel market traders and channel foreign currency into the formal market.

The monetary policy struck the right chord in terms of providing liquidity on the auction market, curbing illegal foreign currency trading and rampant informalisation of the economy. Questions still remain on the source of foreign currency being allocated on the auction system and how it will be paid back.

A number of constraints also lie ahead, these include reservations from exporters and other foreign currency holders, who firmly believe that the parallel market rate is the genuine rate to liquidate their foreign earnings. These foreign currency holders have taken a back seat while observing the auction system, only liquidating when necessary and to comply with the regulations. To improve confidence, the central bank needs to decentralise the auction system to be managed by commercial banks and allow the gap between the auction rate and parallel rate to close. The two rates do not necessarily need to align but a slight gap is enough to provide incentives to exporters and other foreign currency holders to use their foreign currency in the formal economy. The central bank will therefore not need to provide any monetary incentives to commercial banks, exporters, tobacco farmers and other foreign currency holders to partake in the auction system as foreign currency will slowly find its way to the formal system.

The central bank must ensure that winning bidders on the auction market get their foreign currency on time to squeeze out the parallel market. The auction system can only be sustainable in the long term if confidence improves to direct more foreign currency to the formal market. More importantly, the central bank needs to desist from any measures that will grow reserve money in the economy as that will put pressure on the exchange rate and erase the gains achieved through exchange rate stability.

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