After the Reserve Bank of Zimbabwe sent out their cryptic message via twitter on Friday 20 minutes before midnight Zimbabweans have been on a knife-edge. Perhaps the statement was meant to quell the parallel market exchange rate which had shot up from ZWL$30.8 for a US dollar to ZWL$35 for a US dollar between the 2nd and 6th of March. Sadly the statement either had zero effect or seemed to heap more pressure on the reeling Zimbabwean dollar which further slid to ZWL$39.5 as of the time of writing this (Wednesday 11 March 13:00). The much anticipated joint press conference between the Ministry of Finance and the Reserve Bank of Zimbabwe dolled out a host of new measures that the duo intends to take in order to stabilise the exchange rate. However, the excitement over the presser turned out to be unwarranted.
Both Reserve bank Governor John Mangudya and Finance Minister Mthuli Ncube took time to wax lyrical about each other’s work in spite of the state boldly disagreeing with their efforts. A raft of new measures was announced or said to be in the pipeline including “freeing” the interbank market, removal of fuel subsidies, gold incentive scheme removal, phasing out of foreign currency tax payment and a live tracking system based on the Thomson Reuters system as was promised last year.
Bureaux de Change
The BDCs were given much attention as they will be liberalised, however, they are strictly market takers and will be restricted to a 5% margin above (or below) the interbank rate. We saw this rule introduced last year after the BDCs were aggressively going after forex and pushed the interbank rate to the parallel market rate. The BDCs will be allowed to keep a float of US$20000 and may (be compelled to) sell the excess for Zimbabwean dollars to the Reserve Bank.
Reuters live trading system
Among the many failures of the interbank was a lack of central organisation which even the parallel market as large and diverse as it possesses. The Reuters live system will track all trades and therefore can determine a true interbank market rate. While joining the platform is voluntary one cannot see a case where banks go against the Apex bank. The system will produce price “fixes” to give a morning and evening price for each day. The RBZ will intervene in the interbank market by tinkering with liquidity though they are more likely to take foreign currency than give it.
The Reserve Bank
The Reserve bank shall stop issuing letters of credit to fuel importers and will instead allow fuel companies to purchase foreign currency on the interbank market. The fuel subsidy system has been abused and criticised and if it is really let go off will bring some sanity to the situation. Another subsidy facing the axe is the gold incentive which paid gold dealers an additional 10% of their dues in Zimbabwean dollars. This was cited as one of the major reasons for money supply growth as the bank battled to keep gold shipments coming in as buyers were deterred by the foreign currency surrender requirements. However, the Letters of credit system is still in place and all letters to be issued at the interbank rate of the day.
Cash budgeting is back
In the now-famous words of former Finance Minister Tendai Biti, “we shall eat what we kill“. The statement referred to using a cash budgeting system for the government. Well, the current finance minister has pledged to bring it back. So the government will avoid debt in layman’s terms. The government has also pledged to bring a bit more sanity to the Treasury Bill issuance program by forecasting ahead and creating a calendar. We will have to see this in operation to make a call on its effectiveness. Professor Ncube boldly claimed that the government has a lot of cash, ZWL$3 billion to be precise and wouldn’t need to borrow soon. So why mention borrowing? Treasury bill auctions will now receive Monetary Policy Committee (remember them?) approval first.
Interest on deposits
Banks shall be mandated to offer interest on deposits held with them. The two fellows reckon this will incentivise saving. It’s a positive step but unless those interest rate on deposits outstrips inflation (which has averaged 17% in recent times) they will mean precious little to anyone.
War on the parallel market
Once again parallel market traders were put on alert as a review of penalties and the regulations regarding those activities will be reviewed. The penalty for trading foreign currency still stands at 10 years in prison and its hard to see how that could possibly be made any more deterrent. We should expect a slew of measures to be announced in the near future. The statement also gave a nod to mobile money platforms which are being targeted as the platforms enabling this trade and their regulations will likely be tweaked in the near future.
What does this all mean?
So what do all these real-time systems, margins, the dropping of subsidies and interest on deposits mean for you and me? Nothing much. Once again the two chaps entrusted with guiding this sinking ship have completely missed the mark. Neither the Zimbabwean economy nor the monetary space need cosmetic changes right now. No real mention of the money supply growth which continues to cause exchange rate spikes and rampant inflation which we can expect an announcement on within the next days. None of the critical failures of the interbank market were addressed in this statement and I’m sure by the time you read this article the exchange rate will have moved again. The only way is up.