The hottest topic yesterday had to be the announcement of the much awaited and delayed mid term monetary policy statement. Some will feel vindicated by the revelation that RTGS balances together with bond notes and coins will now be referred to as RTGS Dollars which will be auctioned through an inter-bank foreign currency auction system. The question is of course what does it mean for you?

Rates to float

There have been calls for a long time to drop the 1:1 rate fallacy so many have welcomed this development. Parity could not simply be maintained given the lack of foreign currency in the system. The reserve bank lacked the capacity to maintain the rate and moves like the foreign currency allocation system just heaped more pressure on the apex bank. The governor assured people that while there are nearly RTGS$10 billion in the banking system not all 10 billion is chasing foreign currency amounting to around US$450 million in the system. The difference between the two is staggering and perhaps an indicator of things to come. According to Mangudya only RTGS$1.8 billion is available to chase foreign currency.

With limitations

There are some interesting points from the statement when we look deeper though. The auction system has been set up inter-bank. Now bureaux de change are also authorized to purchase unlimited amounts of currency in a day but limited to selling for small specified transactions and to a daily limit of $10000 per bureaux. Clearly the thinking here is to freely allow foreign currency into the banking system but to limit outflows. So as such at close of businesses the bureaux would have balances which they need to sell off to have RTGS dollars for buying dollars the next day. In addition exporters allowed to retain foreign currency have been given a 30 day “use it or lose it” rule that forces them to either use up their foreign currency in Nostro accounts or surrender it to the inter-bank auction market. Again the good Governor wants to get those US dollars in the market but surely there’s something to be said for a policy that discourages saving of foreign currency. What of seasonal businesses? What of war chests?

RTGS dollar now unit of account

Another major highlight is the RTGS dollar becoming the official unit of account. This is set to send potential shockwaves. All pricing and reporting to be done in RTGS dollars. Now what’s confusing is the maintenance of the multi-currency terminology though moves are essentially towards the RTGS dollar being a lone standing legal tender. Perhaps they are trying to cushion the blow. So the big question here is around current agreements and debts. For example is your what is your salary now? Due to the October separation of  Foreign currency accounts (Nostro) and now RTGS$ accounts it should simply follow that all non foreign currency amounts are RTGS$, so only their name has changed. Where amounts are denominated expressly in US$ the inter-bank exchange rate comes into play.

But what about USD pegging?

I’ve also written before about the Real Value Accounting or pegging (to the US dollar) is being used in the market with prices being set in US dollars and recalculated at the prevailing market rate. So RTGS dollar pricing may in fact create what looks like pricing loop but is rather a continuation of the real status quo. The governor went on to say that current price levels should be maintained but price controls have been difficult to enforce in the past so it will be interesting how they approach this.

Treating a symptom

While many will celebrate the floating of currency we may have to look deeper to see if this is a master stroke or another policy that falls far short of what is required. The movement of the bond note rate against the US dollar can be best attributed to the increase in RTGS dollar money supply. The graph below clearly shows the extent to which the money supply increase has influenced rate movement since the 2014 introduction of bond coins. While the period 2009 to 2013 will be remembered as the growth years after 2008, we saw a slowing of money supply growth in 2013. Enter the bond and the rest as they say, is history. Money supply growth has slowed in recent times but it remains to be seen if this is a short term anomaly or the new trend.

 

Demand for USD

In the monetary policy statement the reserve bank governor stated that bureaux de change would be permitted to sell US dollars to the public for the payment of subscriptions and other foreign payments but not for the payment of foreign school fees. People have long used the US dollar as a store of value and the governor seems to have not considered this need in the policy statement. Surely more detail will be availed as the the system starts operating. The parallel market emerged because the formal market failed to cater to needs of the market and introducing a system that does not cater to these needs will only give the parallel market a greater platform to operate on. This despite a clampdown on the parallel market. So allowing citizens to pay for Netflix subscriptions but not school fees or to buy US dollars to hold is another move that surely left many scratching their heads.

Lightning strikes the same place twice

We all know the saying and it seems lightning has struck Zimbabweans savings twice. The foreign currency floating and auction system is not new. Gideon Gono in his eventful time as Reserve bank Governor introduced the same system with less than stellar results. Ultimately there was a loss in savings. While the loss of value in savings and pensions was already seen in the market the flotation of the RTGS$ was the final nail in the coffin and any hopes that remained of salvaging savings made in US dollars were extinguished. It’s saddening and the fallout will be massive. Twice in a lifetime for some. The overall trust for the banks and financial institutions was dealt another blow. Will banks be able to turn around the minds of Zimbabweans so soon after such a major blow?

Will it go up or down?

This is the question everyone has and it’s very difficult to answer at present because once again we have been presented with a policy that is sorely lacking in the detail required to make a determination on things going forward.  First and foremost money supply needs to be addressed, all will be for nought if money supply continues its upward trajectory. The policy environment is also of concern, the many other fundamentals that have left us a net importer of goods and hence a net exporter of foreign currency have not been addressed. Limitations on the selling of foreign currency to individuals may leave the bureaux de change unattractive compared to the parallel market.

The more things change, the more they stay the same. If this monetary policy statement is all we are going to get in the way of policy then we are far from addressing our challenges.