On the 20th of February 2019 Reserve Bank of Zimbabwe Governor John Mangudya announced a much anticipated, and also delayed, monetary policy statement. It put to rest and partially confirmed some theories that had been doing the rounds prior to the statement. More importantly, it introduced an interbank foreign currency market.

What we thought

Early on people largely believed that the exchange rate between the RTGS dollar and the other currencies in our multi-currency system had been liberalized. So this would mean free-flowing foreign currency and the end of pricing nightmares. The most optimistic amongst us dared to dream of a stable currency.

What we actually got

The interbank market was in all honesty and has proven to be another 1:1 with a sanitized face. Sure it’s not as bad as 1:1 but with companies failing to access their foreign currency requirements is there a real difference? It’s the same stories, the same results. Mthuli Ncube continues to use big words, Mangudya continues to make bizarre statements, prices go up, fuel is in short supply and salaries are largely static.

Why the interbank market has failed

The Devil is in the details. In an early analysis of the monetary policy statement, the cautious among us pointed to the finer details and rules around the interbank market that were found in the statement.

Great for buying but not selling

The interbank market commenced trading at USD1: ZWL2.5, at a time when the parallel market had just hit USD1: ZWL4.05. This market was clearly not going to attract much foreign currency at that rate. As a result, we have seen the rate in the interbank market increase considerably as at 15 May it was quoted at 3.39. That’s an increase of 35.6% in just shy of 3 months. It’s also important to note the gap between the interbank and parallel market rates is widening, currently at 2,7 (parallel market rate being 6.1 at the highest quote). This difference held steady at around 1.2 just over a month ago.

Conversely, these suppressed rates make a great market for buying foreign currency, so whatever foreign currency was initially available in the market would’ve been snapped up very quickly because of the deep discount and not likely found its way back. This explains the low volumes traded on this market.

Made to buy but not sell

In explaining the rules for Bureau de change which would be allowed to participate in the market the governor stated that they could buy unlimited currency but could only sell to a limit of US$15000 per day. This was really the first sign that all is not well. Assuming a closed system with limited US dollars this would mean that after long enough the banks and BDC would hold all the foreign currency, in theory at least. None the less it made for a market that was created to buy forex from you but not to sell forex to you.

The banks set the rate

Another cardinal issue in our analysis of the interbank market must be the setting of the rate. To look at this objectively, the Reserve Bank of Zimbabwe which had little foreign currency and banks who also possessed little foreign currency sat down and determined the exchange rate excluding those who had the foreign currency. So laughable was the situation that word on the street was parallel market dealers were saying “please go and buy from the bank and sell it to me”. Setting a rate was never a good idea, doing so without market participants was certainly a bad idea.

Market takers, not market makers

There’s a common ideology in business sometimes called the 10X rule. If you are to enter an existing market to take over you must improve the offer by at least 10 times. It’s an ideology so the 10 times is for dramatic effect but the principal remains you must offer a significant improvement to take over a market. Coming in at well under the market price made the Banks market takers from the outset. That and that little thing preventing people from buying openly through the interbank market meant the one advantage it offered was not accessible.  We can argue that industry had access to the deep discount but did they really?

For a market to work it must serve its participants. The parallel market in spite of all stigma attached to it was competently carrying out the job of providing foreign currency. The rate may have been higher than we would be comfortable with but the rate is a product of supply and demand factors plus outlook of market participants. That is to say, the rate is a result of conditions and not a condition in itself. Historically fixing the rates has not been successful, the conditions are what need fixing to ease or stabilize the rate.