Tinaye Agere
Persistence Gwanyanya
CONSISTENT with sound economic management, the Monetary Policy Committee (MPC) met on June 6, 2023 and passed resolutions to support stabilisation measures that were announced by Treasury on May 11 and May 29, 2023.
The multifaceted nature of price and exchange rate instability in Zimbabwe demands combined supply- and demand-side interventions to pin down.
Supply-side measures are expected to increase the supply of foreign currency in the formal system to meet importers’ requirements.
Key among the measures is the establishment of a wholesale foreign currency market, where the Reserve Bank of Zimbabwe (RBZ) sells forex to banks for onward sale to customers.
The wholesale foreign currency market is not new as it was approved by the MPC on February 2, 2022.
All what RBZ is now doing is to operationalise it.
Under this system, RBZ sets a market-determined floor price at which banks buy forex for onward sale, but now without limits on the trading margins. This is in line with international best practice.
In the past, the authorised dealers were limited to trading at margins of 10 percent.
Using the weighted average exchange rate achieved in the first wholesale forex auction system trade of US$1: $4 869, all the usable bank balances of around $219 billion can be wiped away by US$44,97 million.
The usable balances largely comprise non-negotiable certificates of deposits (NNCDs), as the excess reserves have been very low at around $100 million since 2022.
This only demonstrates that what is driving the rate is not excessive growth in usable balances but negative perception about Zimbabwe dollar depreciation, which results in market players exiting this currency en masse, thus accelerating dollarisation.
The total amount of US$11,18 million allotted on the first trading session on June 7, 2023 amply demonstrates my assertion of low usable balance as the major constraint to the demand for forex.
It seems the bulk of bids banks submitted were under US$1 million, as banks do not have the required usable Zimbabwe dollar in their positions to support high demand for forex.
A couple of banks, however, could not get some allocation as their bids were below the floor price of US$1:$4 500, which attests to RBZ’s commitment to a market-based exchange rate.
Going forward, we expect demand for forex to decline as the allotted amounts are effectively sterilised by the RBZ.
Comforting is the fact that RBZ has the required US dollars to intervene in the market until stability is achieved.
Even more comforting is the fact that the RBZ is not abolishing the Dutch auction system.
Weekly allocations under this market have been maintained at US$5 million.
However, the central bank has collapsed the small and medium enterprise (SME) and main auction markets into one to cater for the wide needs of players as they get used to the interbank market.
The widening of Dutch auction limits to US$1 500-US$50 000 from US$2 500-US$20 000 is, therefore, unsurprising.
Even individuals in the informal sector and those with smaller requirements such as for payment of school fees will be accommodated.
The bureaus de change have been equally capacitated, as RBZ doubled their weekly allocation to cater for the needs of all and sundry. In the past, the interbank market was accused of allocative inefficiency resulting from corruption and nepotism by bank officials.
This time around, RBZ and the Financial Intelligence Unit (FIU) shall maintain a watchful eye on the operation of this market.
Importantly, increased demand for the Zimbabwe dollar to pay for duties, taxes, fees and levies due to Government, most of which are now payable in the local currency, is expected to see adjustment towards rate equilibrium.
Following the announcement of stabilisation measures already alluded to earlier on, Treasury has already issued directives to Government ministries, departments and agencies to religiously observe the multiple currency regime, which compels them to accept Zimdollar payments.
The Government recently enacted Statutory Instrument 93/2023, which compels electricity providers to charge non-exporters for electricity in the local currency.
We expected more legal enactments to enforce the multiple currency system, especially for duties and taxes, to boost Zimbabwe dollar demand.
Most importantly, money supply growth is expected to significantly slow down following the transfer of external debt and its payment from the RBZ to Treasury.
Treasury shall provide Zimbabwe dollar funding for the purchase of US dollars needed to repay external debt from the 25 percent forex surrender.
Private sector Zimdollar credit creation has actually been dwindling and, thus, poses minimal risk to monetary expansion.
As such, even the small increase of 5 percent in both the bank lending rate and medium-term bank accommodation is not seen as a major threat to monetary expansion.
In fact, maintaining the rates within previous levels is necessary to mitigate against the risk of dollarisation.
Furthermore, the increase in statutory reserves to 15 percent from 10 percent is also seen as curtailing money supply growth.
As such, given the tight Zimdollar conditions, we expect voluntary liquidation of the US dollars.
We understand that banks have been holding an average of US$800 million and US$1,4 billion, which might mean there are huge amounts of forex being kept in safe deposits of banks. These amounts are expected to chase the usable balances of $219 billion in the whole economy.
As such, we expect the interbank market to be self-liquidating going forward.
Also, the increased statutory reserve ratios for forex are seen as minimising the risk of forex exposures, which normally takes a toll on its convertibility.
Currently, the banking system is in a safe and sound position, with no risk on non-convertibility of Nostro RTGs balances.
Of the US$1,38 billion in the foreign currency accounts as at March 15, 2023, only US$85 million, or 6,15 percent, were Nostro RTGs balances (domestic).
The balance is composed of cash at banks (US$633 million) and Nostro balances (US$664 million).
The foreign currency lending at loan-to-deposit ratio of 68,2 percent also remains well within RBZ-accepted levels of 70 percent.
This amply demonstrates that there currently is no risk of non-convertibility of foreign currency in sight.
As such, there is absolutely no need to panic.
In addition, the operationalisation of digital gold tokens in the transactional space is seen as a major boost to Zimdollar demand.
RBZ expects this to happen by mid-June this year.
The acceptance of digital gold tokens by the major wholesale and retail chain shops will be a game changer.
The digital gold tokens will take care of value preservation needs of the market domestically, which has been driving the demand for forex.
Clearly, return to stability in the shortest possible time is quite possible.
Persistence Gwanyanya is the founder of Bullion Group International and a member of the RBZ Monetary Policy Committee. He writes in his personal capacity. For feedback, WhatsApp +263 773 030 691
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