Sustaining Zimdollar stability

AS expected, there are some who are questioning the sustainability of the current exchange stability.

Persistence Gwanyanya

Among these are extremists who believe it will not last.

Their pessimism is based on previous experiences.

To them, the current situation is reminiscent of what we experienced in the second half of 2022.

Stability achieved on account of the implementation of value-for-money audits in August 2022 could not last beyond November of the same year.

Just like what happened during this period, they argue, the current exchange rate stability is artificial, having been achieved on the back of starving the market of Zimdollar liquidity by the Government.

Importantly, these pessimists insist that, just like before, the exchange rate is holding as a result of non-payment of contractors and suppliers by Government.

As such, the exchange rate is expected to run when Government resumes payments to contractors and suppliers.

However, contrary to this view, whilst there could be some delays in settling contractors’ invoices, they are now largely being paid in foreign currency — up to 80 percent in some cases.

This minimises exchange rate risk for the contractors and recurrence of currency volatility due to lump sum Zimdollar payments.

However, strict adherence to the current policy of settling creditors in line with cashflows, as the Government tries to maintain a cash budget, is seen as key to sustaining stability.

A stable environment mitigates the effects of delayed payments to business viability.

It is important to highlight that, despite the usual social media noise about payment to creditors, Government’s performance in this regard has significantly improved.

Given the size of Government procurement, which constitutes about 72 percent of the economy, payment delays can be attributed to a number of factors, from administrative ones to complexities of transactions.

The need to adjust invoices, in line with weekly changes in the interbank rates, is an example of an administrative issue that can result in payment delays.

Admittedly, even the corrupt tendencies of personnel involved in processing the payments could be a causal factor of payment delays.

Due to the country’s inability to contract long-term capital suitable for infrastructure projects, there is always bound to be a trade-off between investment in capital projects from short-term capital and stability therefrom.

As such, contractors should bear with Treasury when payments are delayed.

Going forward, there may be need to find a critical balance between infrastructure development and stability imperatives.

It is now clear that the fear of election-driven profligacy, which could be the major driver of rapid currency depreciation soon after proclamation of the election date on May 31, 2023, could be misplaced.

Current evidence points to the contrary.

Government is actually tightening the monetary environment whilst pursuing prudent fiscal policies.

Interestingly, this is happening when we are left with less than two months to the general election, scheduled for August 23.

Clearly, this represents a break from the past, which gives us confidence that Government is serious about stability.

Regarding pressures for salary increments for civil servants, Government seems to have a plausible plan to deal with this issue in a non-inflationary manner.

It is understood that a significant portion of salary increments will be in forex.

Even the small Zimdollar portion of the increase makes sense to beneficiaries, especially in a stable economic environment.

Questions on the sustainability of sources of foreign currency to pay wages and contractors, as well as suppliers, have been well- explained by Government.

Currently, half of revenue collections by Government is in foreign currency.

This is despite an increase in dollarisation levels to around 80 percent, which demonstrates the effects of high levels of informalisation in Zimbabwe.

This is why tax structures that reach everyone, including those in the informal sector, such as the Intermediate Money Transfer Tax and excise duties on fuel, remain key to revenue collections.

In most cases, these taxes present Government with the only opportunity to collect taxes from the informal sector.

With regard to the supply of forex to the wholesale foreign currency auction system, Treasury has been relying on its reserves, not export surrender money, as most analysts seem to believe.

Commendably, Treasury is sitting on significant reserves to seed the wholesale foreign currency system until it becomes self-sustaining from voluntary liquidations of foreign currency.

It is also comforting to note that Treasury and the Reserve Bank of Zimbabwe (RBZ) are finalising administrative issues to clear the foreign currency auction backlog.

We also understand there are discussions among Treasury, RBZ and banks who pre-financed the auction to resolve their outstanding obligations under this arrangement.

This is necessary for a smooth transition towards the interbank market.

It is equally comforting that Treasury is actually prefunding the respective accounts of exporters to minimise the risk of any possible delays to pay for export surrender.

This is envisaged to continue providing transactional convenience to customers.

In view of all the above, the current stability is indeed sustainable.

But there is need to understand that the market is still adjusting following the recent bout of instability.

It appears the temporary rise in demand, driven by the need to offload the Zimdollar at the slightest opportunity, is coming to an end, as the Zimdollar becomes increasingly scarce.

Those who insist on indexing the exchange rate to the parallel market or some crazy rates will be penalised by demand, whilst those who are still rejecting the Zimdollar will soon look for it to no avail.

They might regret when market dynamics change.

We are entering a phase where the economy might have to right-size.

Business has to brace up for a more competitive environment, which also takes into account increased acceptance of the Zimdollar for transactions.

The recent demonstration of commitment by Government to underwrite the Zimdollar is going to be a game changer.

Treasury recently directed taxpayers to pay 50 percent of June income taxes, commonly known as QPDs (Quarterly Payment Dates) foreign currency obligations, in Zimdollars.

The portion of taxes payable in Zimdollar is strictly paid in that currency, without exception.

Encouragingly, we are starting to see voluntary liquidations picking up as companies seek to pay duties, taxes, wages, et cetera.

We expect a massive forex sell-off to follow, as the Zimdollar continues to gain in both the interbank and parallel markets.

The current resistance by some market players who have taken positions when the Zimdollar took a major dip may not last for long.

It is better for such business to let go now because they risk losing more if the current trajectory continues.

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