Finance and Economic development minister brought good news to the insurance and pensions industry by way of the impending Pensions and Provident Fund Bill that would among other things allow industry players to invest off-shore. In effect, it would allow the funds to invest in assets which are not affected by local inflation and economic conditions. This comes as a great intervention as the industry has not been immune to the effects of runaway inflation.
Speaking at the inaugural insurance and pensions industry breakfast meeting on Tuesday the minister updated industry players on the progress of the Bill, the Insurance Act and the amendments of the Insurance Commission Act which would all come before parliament in the 2019 year. “In the first half of the year, all three Bills will come before Parliament . . . It is going to be contained in one of the Bills (Pensions and Provident) that eventually what we are saying is that for now we are transacting in the domestic currency, but we’re allowing a window into foreign-denominated investment assets,” Ncube said.
Insurance companies receive premiums from their customers and invest those premiums in assets ranging from construction projects such as shopping malls to hotels and other investments such as equities. The income derived from these assets will then be used to discharge any obligations arising from claims by the customers as and when they arise. Working with Zimbabwean dollar-denominated assets has proved incredibly difficult as year on year inflation is estimated at around 521%. After the government stopped publishing annual inflation figures. We are set to start receiving them in March (for February 2020) but little is expected to change.
Zimbabwean dollar-denominated assets and returns rapidly lose value as we have seen which puts the companies in a quandary as the cover associated with insurance contracts can easily be outstripped by the cost of replacement of the covered assets. Service providers are happily adjusting their prices in step with inflation which in turn is motivated by the exchange rate which has seen approximately 541% appreciation of the US Dollar (or 85% depreciation in the Zimbabwean Dollar) over the last 12 months. Quite frankly the companies also have a challenge of investing in assets that tend to be highly regulated and they cannot affect price changes easily nor can they easily find a clientele willing to pay those escalated prices.
The off-shore assets in part tackle this problem. The idea is quite simple, just as you and I buy foreign currency from the Bureau de Change and keep it in our FCA Nostro accounts to protect from currency depreciation then convert to Zimbabwean dollars when we need to transact. At the very least, the value of our money is preserved while in practice prices have generally declined in US dollar terms. The Insurance companies will now be allowed to invest 20% of the portfolios in off-shore instruments including the Afreximbank’s Depositary Receipts, which give investors the opportunity to hold equity the bank. It is interesting to see the plate going the other way. The Afreximbank has bailed out Zimbabwe on multiple occasions before and during Mthuli Ncube’s tenure. These include backing the ill-fated Bond Notes, foreign currency bailouts for the interbank market and a convertibility deal for US dollars and Bond Notes that was spoken of once but didn’t see the light of day.
Zimbabwe Insurance and Pensions Apex Council chairperson, Tassius Chigariro said “Even though we all want our local currency, we understand the benefits of our own local currency, we must support it until it stabilises, we are committed to supporting it, but we are also not oblivious to the fact that even a 90-year-old in Guruve, still thinks in US dollar terms. We do not believe we must fight the thinking with directives. The greatest fear of our industry is that the informal market, which is growing at incredible speed, will completely dollarise, while the financial institutions that we so need to help recovery of our nation, are formally de-dollarised, but completely taken out of the financial system. We are your joint partner in attracting FDI (foreign direct investment), please honourable minister (Ncube) do not watch us dying.”
Allowing industries to partially dollarise or giving some access while the broader economy is left out is not a wise move. As Chigariro noted the informal sector is nearing full dollarisation as they do not have regulatory pressure. You cannot help but get the feeling that as time goes on the return of the Zimbabwean Dollar is proving to be an error.
