Real US dollars or not? The folly of nostro FCAs

Ceteris Paribus:Respect Gwenzi

THE exchange rate firmed yet again in the latest auction this Tuesday, taking the firming streak to five straight weeks. This week’s gains were, however, very negligible but positive all the same.

The level of trading activity was positive coming in at US$24 million, which, despite comparing less favourable to a record high performance of US$30 million attained last week, is way above the 15 week average of US$12 million. Authorities are bullish about the local currency while industry is becoming more confident on the prospects of local currency stability in the short term.

The improved forex liquidity on the interbank, which statistically shows a huge improvement on last year, has helped bring down the parallel exchange rate, which is now seen in the range of ZW$90 to ZW$100 from ZW$110 to ZW$120 in June. In 2019, the Reserve Bank of Zimbabwe (RBZ) statistics show that the interbank traded an average of circa US$2 million a session between February and December, whereas between June and September 2020, the average moved from US$3,02 million in the first 10 weeks to US$5,4 million over the latest two weeks.

All these are positive macro-economic indicators. However, with liberalisation of the exchange rate and wider redollarisation of the economy, a phenomenon of multiple price tiers has re-emerged reminiscent of the period from 2016 to 2019.

Some banks are classifying FCA accounts according to source of foreign currency earned such that foreign currency earned from local dealings (between local companies and individuals) cannot be withdrawn but only wired as transfers.

These same banks classify inbound foreign currency coming from outside Zimbabwe differently and allow these flows to be withdrawn. A local company earning foreign currency from its dealings with exporters and partially settling its wage bill and other operating expenses in forex cannot have its staff access the wired money as cash at these banks.

The argument is that the locally generated foreign currency is not fully funded by “cash”, whatever that means. The argument ignores the fact that foreign currency earned by a local business from an exporter client remains the same money as it was while still being held by the exporter.

The basic reading from this is that banks are not confident in the currency system and financial sector regulation measures being enforced by RBZ. The move to restrict access to cash is therefore seen as “prudential” in the banks’ view. This act of banks scepticism and reservation is borne out of the phenomena of yesteryear, whereby government fictitiously created its own US dollar by pumping TBs and attempted to equate it to the US dollar. In the process a massive capital flight offshore emerged as savvy and risk averse business operators anticipated the crisis.

The externalisation of funds was abated by a strong currency regime, which reduced competitiveness of local produce and increased reliance on imports. There was also a huge disparity between the total deposits in the system and the level of hard currency in cash supporting the same as money supply increased.

The implication of this manoeuvre to restrict FCA access is that it promotes discounting of the same forex held in FCAs by street dealers and local retailers in the process fuelling rent seeking. It is a confidence sapping act which reduces Zimbabweans’ trust on the system manning the monetary front of the economy in as much as it does on the broader political system. Hard currency deposits, which have been on the rise may soon plunge, particularly from individuals. Already the lack of access to FCA has resulted in discounts to FCA housed funds of up to 25%.

Dealers are taking away a sizeable margin for giving holders of FCA funds hard cash and thus effectively creating a third exchange rate on top of the RTGS and interbank exchange rates.

This is a time bomb and it is imperative that it is dealt with urgently to boost confidence levels riding on the good run so far achieved on the IBM. Failure to do so gives credence to the narrative that the Bank is minting money and borrowing to sustain the interbank. Otherwise it eludes the mind that forex transferred from an exporter to a local supplier ceases to be funded or backed by cash at the point of transfer.

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

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