Resurgence of Zimdollar

Persistence Gwanyanya

IT appears we are entering a new era in the life of the Zimbabwe dollar.

Its fortunes seem to be taking a drastic turn as the recent price and exchange rate stabilisation measures take effect.

As l indicated in my previous articles, Treasury is pivoting towards exclusive Zimdollar demand, starting with income taxes, commonly known as QPDs (quarterly payment dates).

This commendably signals Government’s determination to underwrite its own currency. On June 23, Treasury issued a directive that compels taxpayers to pay 50 percent of the forex portion of corporate tax obligations (QPDs) exclusively in Zimdollar.

This is happening at a time when the market is literally dry of the local currency following the mop-up of around $300 billion from the sale of about US$50 million in the four forex trading sessions since the implementation of the wholesale foreign currency market.

It also coincides with payments of salaries as we approach month-end, which implies tighter Zimdollar conditions.

Interestingly, Treasury greenlighted taxpayers to approach the Reserve Bank of Zimbabwe (RBZ) for liquidation of foreign currency in the event they fail to be assisted by their banks. Ideally, taxpayers should not deal directly with the central bank, but through their banks. However, due to what appears to be inefficient financial intermediation, especially regarding trading of forex in the interbank market, this unconventional approach may be necessary to guarantee transactional convenience to customers.

With the direction we are taking, there is need to support the resuscitation of the interbank market, which has been inactive for many years. Banks should start establishing trading limits so they trade foreign currency among themselves before seeking the RBZ window for accommodation in the event of short Zimdollar positions.

The unhealthy concentration of liquidity in few banks makes resuscitation of the interbank market extremely urgent.

More than 80 percent of liquidity — both Zimdollar and forex — is concentrated among five banks. In an efficiently functioning interbank market, customers should be able to access this liquidity with ease as banks trade amongst themselves. For example, a customer should be able to sell foreign currency in, say, CBZ, even if the bank is short of Zimdollar, because the financial institution can approach another bank that could be sitting on huge sums of Zimdollar.

It is advisable for banks and bureaux de change to consider retraining of treasurers or dealers, as well as other office staff who interact with customers on a daily basis so they correctly advise customers in this transitional period.

It is worrying that transmission of RBZ measures to the market through normal banking channels is currently inefficient.

This is undesirable given the high entropy between the market on one hand and RBZ and the banks on the other, of course, on account of past experiences, notably hyperinflation, which resulted in historic loss of value.

The rigidness of commercial and central bankers cannot be tolerated in the current era, where we are trying to resuscitate the Zimdollar. In fact, the Government, RBZ and bankers should redouble efforts to regain market trust and confidence, given the unpleasant experience with the Zimdollar that l highlighted earlier on.

Importantly, in a highly informalised market, where most of the few formal participants have literally ignored Government policy, there is need to beef up policy awareness and communication.

This is very important if we are to make the market believe in the Zimdollar and rally behind Government policy again.

Engagement is equally important if we are to durably lift suspicion and fear.

However, so far, it appears there is still some resistance in the market ostensibly due to the belief that the latest pronouncements might not last. There is also a constituency that bought forex when it was still very expensive — as high as US$1:$9 000, in some cases — who need a lot of convincing to believe that the current trajectory will be sustained before they can liquidate and incur exchange rate losses.

There are also still some who are receiving payments at a higher rate agreed earlier before the softening of the rate.

This group of market participants is still affording to pay higher rates.

We expect the new reality of Zimdollar stabilisation to bed down in the next few weeks, as the market responds to the measures.

Just like in the case of the sudden depreciation of the Zimdollar, it is most likely that if the tight Zimdollar situation continues, there may be a sudden strengthening of the currency due to massive sell-off of forex (US dollars) as it weakens.

As such, it is advisable to take a clue from the Government and pivot towards Zimdollar holdings.

Pivoting towards wide Zimdollar use by Treasury is seen as a vote of confidence in the local unit.

It gives confidence to the market when the issuer starts supporting its currency, especially when all odds are against it.

Persistence Gwanyanya is the founder of Bullion Group International. He is also a member of the RBZ Monetary Policy Committee. He writes in his personal capacity. For feedback, WhatsApp +263 773 030 691.