In our coverage of the announcement that ended the multicurrency era and brought back, in name at least, the Zimbabwean dollar I mentioned the need for further reforms to the interbank market in order for the changes to have a meaningful and discernible effect. Further advice was provided to banks via a directive from the Reserve Bank that has not received the attention it deserves.
The devil is in the details and just as they did a good job of sneaking in the details when the RTGS became a currency, the government snuck in the details while people fussed over Statutory Instrument 142 of 2019.
A. The RBZ seeks to remove extra Zimbabwean dollars that are chasing US dollars from the market. The RBZ made Ana accommodation to those entities with foreign domiciled legacy debt who were failing to acquire foreign currency on the interbank market. The RBZ seeks to provide the foreign currency required for these debts at 1:1 with the US dollar.
The intention here is clearly to reduce demand on the interbank market by clearing up the backlog. The interbank market has not performed to desired results in rate containment or provision of foreign currency. Whether or not the RBZ has the currency to fulfil this unknown for now.
B. The move is likely intended to reduce borrowing in the nation with the ultimate move being to reduce money supply growth. Increasing the cost of borrowing will effectively push out some of the borrowers and likely see an increase in non-performing loans. In theory, at least money supply growth will be contained by this measure and as a result less pressure on the rate as there is less money chasing foreign currency.
C. This may be the most important one here depending on interpretation. If we are to take it’s plain meaning the limits that dogged the interbank market are gone. However, the brevity of the statement has robbed us on clarity. Allowing the interbank market to compete with the parallel market and offer competitive pricing. The interbank market also has the crippling restriction on selling foreign currency to people and unless this is included in relaxation of administrative limits the move will not reach its intended purpose.
D. There’s long been a belief that the Old Mutual shares have been used as a legal means to transfer large sums of money between Zimbabwe, South Africa and the UK. Through buying in one place and selling in another. The 90 day vesting period for shares simply closes this avenue to those who seek this channel. The Old Mutual Implied Rate is heavily relied upon and was indicative of the movements in the parallel market until recently. Though the parallel market has grown legs of its own far outshooting the OMIR, the rate is still an important indicator.
E. Of course, the biggest problem on the interbank market has been the supply of foreign currency and enforcing the 50% surrender conditions through banks who hold money on behalf of foreign currency earners looks to address the supply side of the interbank market’s troubles. This move is tricky as things stand. Finance ministry permanent Secretary George Guvamatanga spoke roughly a month ago about the delays that were being experienced in money being remitted to exporters. This certainly won’t inspire any confidence in them.
Will this work?
What we were doing was not working, that is firmly established. So for some, any change is better than staying still. The saying “out of the frying pan, into the fire” also comes to mind. Ultimately the effectiveness of these changes and the return of much-maligned Zimbabwean dollar will depend on how deep the changes are. A name change is not enough, a change in the fundamentals behind the currency and the behaviour of its backers is what is needed. So how much this works depends on how far they are willing to go.