Finance and economic development minister Professor Mthuli Ncube yesterday announced to journalists and the nation that treasury would facilitate currency swap agreements between China and Zimbabwe to assist in repatriation attempts by the Chinese and to assist Zimbabweans to make payments to China. According to the finance minister, this would alleviate the burden of wire transferring money while be a workaround for exchange control regulations.

Currency Swaps

A currency is a simple arrangement, at face value, which seeks to match two parties operating in two different domiciles and therefore currencies, to each other. Business A operates in Zimbabwe and has an obligation to a company in China. Business B operates in China and has an equivalent obligation to a company in Zimbabwe. Through a bank, the two will be matched. A would settle B’s obligation while B settles A’s obligation. The bank would charge a fee for matching the two. In some cases the may be timing differences between the settling of the obligations which may incur an extra charge for any changes in currency value due to the time difference.

We are doing it already

While the minister comes to the media to announce an existing practice facilitated by banks we may as well point out that the practice is prevalent with Zimbabweans at home and abroad who often use the mechanism, without intermediaries to effectively move money around. It is difficult to estimate how much money moves around in this manner in Zimbabwe but the practice is certainly prevalent.

The minister, of course, has good intentions with this move, as the general population have found it does grossly simplify things. With the interbank market operating only in name it is extremely difficult to source foreign currency in a market whose only source of foreign currency are the forced surrenders and tax payments which many businesses are finding ways around.  While the parallel market can easily satisfy the needs the headache of then depositing the money in order to transfer it or making transfer arrangements would still have to be dealt with. So, in theory, the benefits are many.

In one of his addresses on the subject, the minister then said perhaps the dirtiest word that can come from a person speaking on behalf of the Zimbabwean government. Implementation. In response to a question of when the agreement starts to operate the minister said it is as good as started and only waiting on implementation. It is very difficult to botch a currency swap but implementation is one of many weak points for our government. The minister also mentioned that the agreement would extend to any country where Zimbabwe has similar relationships.

What about the interbank market?

The big question that remains in all of this is why not just create an interbank market that actually works. One that serves the needs of both buyers and sellers of currency. That favours neither but serves both. This would easily do away with the need for such arrangements and their newsworthiness. As I said before it is a service normally offered by banks. In the present situation, one would not be in a hurry to enter such an arrangement as the interbank rate falls short of the Zimbabwe dollars open market valuation. Certainly, the person selling Zimbabwean dollars would be happy to buy currency at the interbank rate but the person on the other end of the transaction would lose a considerable amount ( roughly ZWL$6 per every US dollar). So the idea in principle is good but the interbank rate is deterrent.

Busy-ness as usual

Another tactic to appear as though they are working flat out on the problem by introducing an idea that has been in existence for practically as long as business has been done across borders will simply not be enough. Understandably China may find ways to encourage its nationals coming into Zimbabwe to use the route but its uptake will be very difficult to accept for those initiated in the nuances of the Zimbabwean financial system.