Retention adjustments strong signal on forex sufficiency

The Mid-Term Monetary Policy Statement, which came out at the tail end of the week was perhaps a key highlight in markets. The policy statement introduced measures to further buttress the foreign currency trading market by tightening loose ends and stopping further leakages and allowing for more liberalisation of trading.

Respect Gwenzi

Some of the measures introduced include a blanket increment in export retention to 70% from an average of below 55%. Only gold export retention enjoyed a higher ratio at 70% following March’s adjustment. By increasing the retention ratio, the Reserve Bank of Zimbabwe (RBZ) hopes to give more control of the interbank market to private players, who primarily are the generators of the foreign currency.

Exporters have long decried low retention and the implication on profitability. Lower retention in a hyperinflationary environment had the impact of reducing income in real terms as converted earnings will attract a lower government set exchange rate, which is widely off average market levels.

The gap between the converting rate, previously dictated by RBZ and the parallel exchange rate, which informed pricing of goods and service in the economy created both income loss in real terms and cost surges at operations levels which collectively weighed on exporting companies’ bottom-line. Further to this, forced retention in a hyperinflation environment, highly exposed earnings to currency risk and led to exchange losses.

Further to the retention debacle, the liquidation of unutilised foreign currency balances within a very small window of 30 days had a rattling effect on exporters. It essentially created a scenario where production is disincentivised. When you produce and sell more within a short period of time, creating additional cash flows, RBZ would penalise you by exchanging your unutilised balances with a currency which is grossly weakening and at a price that is sub optimal.

As a consequence, exporting companies particularly those in non-manufacturing sectors, were rationalising production and strategically dampening selling gaps to avert the potential loss of value emanating from forced conversion of unutilised balances.

To demonstrate that this measure was having a negative effect on exports, trade data for the country shows a gross value underperformance in the current year compared to the prior year for the first half period. According to Zimstat, cumulative exports for the first five months of the year stood at US$1,88 billion compared to US$1,96 billion in the same period last year, a decline of 4%.

The anchor export commodity has shown poorly in volumes terms and July data shows a 50% decline in deliveries to Fidelity Printers year on year, in that respective month. Cumulatively for the seven months period to July, deliveries are lagging those of last year by 22%. This downward show a sector, which was responding harshly to policy dynamics in the country. Then volumes underperformance in gold also meant a lost opportunity given that gold is rallying at multiyear high to record levels in global markets.

While the Mid-Term MPS reads like an opera dotted with sweet data matrices, the impact of policy shifts and currency volatility on production cannot be overemphasised. It is pleasing, however, to note that the Bank has taken correctional measures, first by ensuring that the currency stabilises and that the exchange rate is market determined. This is being done by potation and skew in favour of private players, which encourages production.

Our view is that by foregoing retention, RBZ is also sending a bold message that the market has sufficient foreign currency and if left to itself, would equilibrate and sufficiently cover interbank demand. It is a practical and more effective way of improving confidence in the market than oral submissions.
This gesture is further buttressed by the lengthening of the liquidation period. These manoeuvres may highlight the degree of confidence on the part of the government and the RBZ, in terms of forex liquidity availability and its distribution using market mechanisms.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. —