‘Banks deal moves markets’. . . target is to fish out, punish bad apples

TATIRA ZWINOIRA

THE Reserve Bank of Zimbabwe (RBZ) says an agreement with lenders in February to improve the flow of funds allotted at the foreign currency auction system has moved the markets, with most banks meeting the set timeframe.

Central bank governor John Mangudya, who spoke exclusively to businessdigest this week, said the strategy meant banks had to tighten due diligence processes to ensure winning bidders were allotted funds within the two-week deadline.

To enable banks to meet their positions, 40% of exports proceeds are retained under the Reserve Bank of Zimbabwe (RBZ) retention system, with exporters receiving 60%.

He said the deal meant banks have to do thorough background checks during the two-week period to eliminate delays.

Mangudya said the banks have reported a few delinquent firms that have breached central bank regulations.

“The agreement is working very well,” he said.

“If there are banks, which are still behind, it means they may have challenges. Forty per cent of funds of Zimplats or an exporter, for example, are supposed to come to the Reserve Bank so that money, which is from their exports then goes on to meet the banks’ position,” Mangudya said.

“When you are doing a wire transfer, you need to make sure there are some compliance checks to conform to all regulatory requirements — international and local. So those two weeks are to make sure banks go through those transactions.

“We have had some reports of some companies, who are not complying; they do not get their funds as a result,” he added.

Delays in releasing of foreign currency undermined companies’ efforts to import raw materials and industrial machinery.

Almost US$800 million flowed into industries by February from the time the auction system was launched in June 2020, according to Mangudya, in his recent Monetary Policy Statement.

“Since its introduction, the foreign exchange auction system has gone through a number of refinements to plug loopholes, taking into account valuable contributions and suggestions from the market.

“The goal has been to ensure the sustenance of the system through enhancing the supply of foreign currency into the formal market, while maximising the system’s allocative efficiency without undermining the proper functioning of the market,” he said.

“A significant proportion of the total amount allotted has been earmarked for imports of essential goods, especially raw materials, equipment, pharmaceuticals, chemicals, fuel and electricity.

“To date, more than 70% of total foreign currency allotted has gone towards import of raw materials, machinery and equipment, while other essential and strategic imports, including pharmaceuticals and chemicals, fuel and electricity have taken around 11% of the total allotments.”

The foreign currency auction system has achieved several milestones since its relaunch last year after flopping in 2004.

It took the steam out of black market foreign exchange rates, which were skyrocketing during the first quarter of 2020.

Parallel market rates reached US$1:ZW$165 during the period, but retreated to about US$1:ZW$120 after the auction floor came through, as importers trooped back to the formal system for some of their forex requirements.

The Zimbabwean dollar has been trading at around US$1:ZW$83 at the foreign currency auction system since the beginning of the year until last week when it marginally fell to US$1:ZW$84.

Introduced in June 2020 to address a foreign currency crisis that had threatened to cripple the already frail industries, the forex auction system is mainly funded through export proceeds remitted by exporters to the RBZ.

But it ran into trouble during the final quarter of 2020, when exporters waited for prolonged periods before accessing funds.