Just a week the RBZ took decisive action in the face of pushes in both the inflation and the exchange rate. One of the steps was to allow banks to transact for amounts below US$1000 in foreign currency sales and purchases. Initially, we believed details would later be revealed which would keep things as they were before; banks are free to sell within a certain percentage range of the auction rate. By Friday we saw banks had massively devalued the Zimbabwean from the auction rate of 142 to 1 to as much as 240 to 1. The whopping 40% devaluation comes hot on the heels of new regulations that allow banks to freely buy foreign currency from individuals and entities. There’s a lot to discuss here.
Free at last?
Proponents of the RBZ policies were quick to state that the RBZ had in fact liberalised currency in the country for transactions below US$1000. On the surface, we could say so. A jump from 142 to 240 represents a devaluation of roughly 40%. That’s a lot at least for recent times but the thinking person would ask why now and why that much? The parallel market commands rates as high as 300 Zimbabwean dollars for 1 US dollar. One would think the banks would go for the jugular if they were in fact free but there’s a bit more to this.
We’ve been here before
Of course, very little is new in Zimbabwe and we have seen the same thing happen and not very long ago. Just 2 years ago when “wholesale” changes were announced to the interbank foreign currency system we experienced a 22% depreciation of the Zimbabwean dollar on the interbank market. In case your memory is fuzzy this “new” interbank system, which was to include a real-time electronic updating system, failed just 3 months later and was replaced by the current Auction system. This doesn’t necessarily mean we will go through the same thing, it all depends on which lessons the central bank chose to learn in the past. We need to remember that the previous liberalisation of the foreign currency system only came after the crisis that resulted in a massive fuel price increase which eventually lead to the January 2019 shutdown.
Why 240 and not 300?
So the question begs why 240 and not 300 as a rate for the banks. Surely if the going parallel market rate is 300 entering the market at a rate that is below this will not change anything. Two important factors feed each other here. Firstly the banks seem to have a specific target as outlined by the RBZ. Again this exchange system for these small transactions doesn’t seem to be for everyone.
Measure v clearly states “…individuals with free funds and entities/corporates holding foreign exchange in their foreign currency accounts… shall be free to sell foreign currency to banks…” so people are free to sell but not to buy. The thing about one-way streets is that you cannot easily come back to them. Secondly, Reserve Bank Governor Dr John Mangudya has on occasion, admittedly in better times, opined that the problem he had with the parallel market exchange rate was the excessive premium that they paid over the official rate. The reserve bank seems to be happy with the premium being between 20 and 30%. You don’t need a calculator to realise that the premium of 300 over 240 is 25%. Looking through recent history things are stable in Zimbabwe when this premium is around the 30% level. So the rate of 240 is not a coincidence of any sort.
We don’t know what the future holds but we have seen how it ends when the RBZ takes without giving especially in terms of foreign currency. Will the auction-rate adjust to meet this new valuation or will it continue to hang where it is? Next Tuesday’s auction will have a lot of information for us.