The Cabinet of Zimbabwe recently approved a proposal to avail foreign currency to manufacturers of basic goods to assist in the procurement of raw materials. According to the Herald, this decision came out of deliberations based on proposals made by the Confederation of Zimbabwe Retailers. Information Minister Monica Mutsvangwa said the move would go a long way in stabilizing prices.
To understand why this is newsworthy we have to look at how we ended up here in the first place and what this move means for industry as a whole. While no details have been given about the workings of the plan, a look at the precedents set by the government will help us understand exactly what it should mean for businesses and ordinary Zimbabweans.
Foreign currency shortages gripped Zimbabwe in earnest in 2014 and the then proposed solution was to introduce the bond note, now known as the RTGS dollar. The bond note was meant to alleviate the lack of liquidity in the market and also purported as an export incentive. The bond note however fed the problem and exacerbated foreign currency woes.
The Reserve Bank of Zimbabwe, up to this point was responsible for availing foreign currency to businesses and upheld parity between the bond note and the US dollar. A parallel market emerged in 2016 which started to place a premium on the US dollar. While the premium crept up slowly, it was fully unleashed in October 2018 when the government made a soft admission that bond notes and US dollars were not equivalent by asking banks to clearly separate them.
The RBZ struggled to honour its arrangement to provide foreign currency to industry. So a foreign currency allocation committee was announced in January 2019. The committee had members from The Office of the President, Ministry of Finance, Ministry of Industry & Commerce, Ministry of Energy and Power & the RBZ. Notable was the absence of industry representation, particularly the manufacturers. This arrangement, however, fell to the wayside as it was ineffective with the industry still struggling to get foreign currency.
February saw the announcement of the delayed monetary policy statement which ushered in the rebrand of the bond note to RTGS dollar and the introduction of the interbank foreign currency market. The market was announced as a measure to allow free trade of foreign currency but the banks setting the US dollar rate at ZWL$2,5 which was a far cry from the ZWL$4 that the parallel market valued the currency at. Furthermore, a market that was set up to buy unlimited foreign currency but had limits on selling while offering an uncompetitive price was bound to struggle. While we were told on multiple occasions that the interbank market had traded amounts in the millions of US dollars, players in industry bemoaned as they failed to access amounts as small as US$500000. It became clear the market wasn’t working with manufacturers failing to access currency on the market and manufacturers being forced to shut down again.
So now the government wants to avail foreign currency to businesses again. What should also be a sticky issue is the proposal that the Minister claims Cabinet has honoured came from The Confederation of Zimbabwe Retailers and not a body that represents manufacturers such as the Confederation of Zimbabwe Industries, which has long been on record about the interbank market getting the pricing wrong for the RTGS dollar. The RTGS dollar currently trades at 3.26 on the interbank market and approximately 5.00 on the parallel market. There have been accusations that foreign currency earners are diverting funds to the parallel market as the rate is favourable there.
It is a sign of where we are and where we are going that the solution to our problem now requires a solution which is similar to the problem.