The stated goals of the February Monetary Policy Statement’s introduction of the interbank market for the newly revealed RTGS$ and foreign currencies was to eradicate the parallel market. The road to hell is paved with good intentions and this is certainly no exception. Rates for the RTGS dollar against the US dollar have been on a steady increase; matter of fact the parallel market rate has risen to match its highest post-October 2018 rate of 4.20 to the dollar, posted on the 20th February.
The interbank rate also recorded a sharp increase to 2.94 to the US dollar quoted on the same date. This marks a 17.6% increase in the interbank rate in the first month of trade. The two rates are moving pretty much in tandem as the graph below shows. Starting from February 22nd when the rate was instituted we have a month of data to work off that shows the rate movement.
After the initial days of trade the premium (or discount) between the two rates has cycled between 1.2 and 1.39 showing a tendency to tighten with time. Last recorded date of trade shows a premium/discount of 1.26.
A mere fortnight ago there was a discrepancy between the expectations of the RBZ Governor John Mangudya and Finance Minister Mthuli Ncube’s for the RTGS dollar. Mthuli forecast a strengthening of the RTGS dollar while Mangudya expected a depreciation. In my analysis of the conflicting statements I posited that Mangudya seemed to have a better understanding of the forces that were at play as they had already conceded to gold miners that the 2.5 bank rate was untenable and paid them at the rate of 3.5.
I also pointed out that the governor at the announcement of the statement said he expected the market rate to settle at somewhere between 3 and 4 to the US dollar. While that estimation was modest given that the parallel market was 4.15 at the time, the interbank rate opening at 2.5 to the dollar did ease the parallel market rate to 3.5 at the time. The interbank market does not include all market participants and this is a telling factor in the markets status. Frankly the market was set to be supported by lines of credit to guarantee foreign currency supply on the market. The market is not a truly open market and for this reason the parallel market remains the most indicative of fundamentals on the ground.
Shortage of foreign currency
There was chaos at the tobacco auction floors as the Reserve Bank reneged on an earlier promise to pay 50% of tobacco farmers dues in foreign currency. This saw an estimated 98% of tobacco being pulled from the auction floor by farmers according to the Herald. The link to the rate increase may have to do with availability of foreign currency. The government may require foreign currency for other purposes and cannot part with 50% of sale proceeds as they had earlier stated.
Increased appetite for interbank rate
The interbank rate, for those who have access to foreign currency purchase through it, is a 30% discount on foreign currency. It is clear that anyone who can would take the opportunity to buy foreign currency at that rate. As many have pointed out it also presents an arbitrage opportunity to buy in the interbank market and sell on the parallel market to make very easy money. It’s reasonable assume that these factors may be putting upwards pressure on the interbank rate.
That time of the month
Lest we forget this month end represents the first full month of operating under the RTGS dollar and interbank regime. Given that the economy has had a month to digest the workings of the system and see where they stand they are now ready to commit to positions. Salaries have started being paid and businesses are looking at their month-ends too. Again for those who have access this would be the time they would be looking for US dollars on the both markets adding to demand pressure on price.
You cannot speak of the Zimbabwean foreign currency market , interbank or parallel without considering the speculators. The government recently announced the increment to civil servants wages which worked out to ZWL$129 per month. A small amount in the scheme of things but as a total it is going to cost the governments an additional ZWL$400 million per month. That’s greater than the surplus government has seen off late thanks to the Intermediated Mobile Money Transfer Tax Or 2% tax. That in addition to tobacco farmers being remunerated in RTGS dollars signals a possible increase in money supply and as I’ve stated many times before that is one of the biggest drivers of our currency’s depreciation. Furthermore whatever trust was placed in the government of Zimbabwe via the valuation of the RTGS dollar by the market is eroded by any signals of more of the same in terms of policy.
We are likely to see a continued depreciation of the RTGS dollar in both markets . The factors behind the depreciation would need to be isolated and identified. Are they supply side, demand side or as I believe, both? The interbank market was a step in the right direction, we just need more steps in the same direction such as a truly open market. We patiently await governments response, if any, to these latest indicators.