As the Reserve Bank of Zimbabwe (RBZ) has reaffirmed its position on the continued use of the multiple currency system, one is naturally tempted to reflect on whether the key economic participants are doing enough to sustain this currency regime.
Being a key channel in the transmission of any monetary policy, the role of banks in sustaining the multiple currency regime is undebatable.
It’s therefore unsurprising that measures by the RBZ to sustain the multiple currency regime are centred on the banking system.
Regrettably, however, there seems to be very little traction in the implementation of these measures by the banks, which calls for RBZ’s urgent intervention.
Needless to mention that while these measures are necessary, they are not a permanent solution to the cash crunch in Zimbabwe.
There is, therefore, need to rebalance the economy through increasing production, whilst simultaneously reducing consumption.
When the RBZ announced the measures deal with cash shortages on May 5, 2016, it stressed the need to sustain the multiple currency system through reducing the inordinate exposure to the US dollar.
At that time, the US dollar was making up 95 percent of all transactions in the country.
This skewedness towards the US dollar increased preference of the same over time as the market shunned other currencies in the multiple currency basket, mainly the rand, which used to constitute 49 percent of currencies in circulation at dollarisation.
Clearly, the multiple currency system was dysfunctional and needed restoration. As such, the Central Bank highlighted its plans to reconfigure the RTGS system into multiple currency to enable other currencies in the basket of multiple currencies to be transacted on this platform by June 13, 2016.
A similar reconfiguration was supposed to be done on the Automated Teller Machines (ATMs) to enable them to dispense other currencies in the basket. Regrettably, this has remained a pipe dream, which calls for urgent review of progress by the RBZ.
The dominance of the USD could be a result of bias by banks towards US dollar accounts as well as credit facilities.
As such, there would be need for banks to market accounts denominated in other currencies in the multiple currency basket such as the rand, pound, pula, euro, Chinese yuan, Japanese yen and Indian rupee depending on the level trade conducted with the respective countries.
Clearly, as repository of client information, banks can capitalise on their analytics capacities to achieve this. It’s surprising that despite the high level of trade between South Africa and China, there are still very few rand and yuan- denominated accounts in the banking system.
Equally worrying is that the lines of credit are mainly in US dollars, despite huge imports from countries such South Africa and China.
Clearly, the measures to increase availability and usage of other currencies in the multiple currency basket would are important to reduce the exchange rate risk arising from the need to convert all invoice into or from the US dollar each time one receives or make a foreign payment.
It would make sense for tobacco merchants to start exploring the possibility of invoicing tobacco to China (which buys 60 percent of our tobacco) in yuan, which would be used to meet the country’s import requirements from China.
This proposition would make sense to China as it tries to promote usage of its currency after it was added to the IMF basket of Special Drawing Rights (SDR) in October 2016.
The banks can use this as a basis for negotiating for lines of credit with favourable terms.
The recent move by the RBZ to reduce the registration fees for bureaux de change is plausible as most licensed money changers that shut down when Zimbabwe dollarised in 2009, resulting in most currency trade taking place in the informal market. However, it seems there is more that needs to be done to increase participation in the formal trade of currencies, given the dominance of the informal sector in Zimbabwe.
This could be achieved through an incentive system, which is comparable to the benefits of formalisation.
It is advisable for banks and the RBZ to increase their import of other currencies to meet the cash demand. It is reported that the RBZ imports about US$15 million weekly, mainly in US dollars, to meet the country’s cash requirements.
In some cases, beneficiaries of this amounts would immediately need to convert it into a preferred currency to make foreign payments, mainly the rand.
It therefore makes sense for the Central Bank to strike a proper balance between the US dollar cash imports and other currencies.
While it is desirable for the country to increase utilisation levels of other currencies under the multiple currency regime, there are other important considerations for shunning other currencies that should be considered.
When the rand was trading at around US$1:ZAR7 at dollarisation it constituted about 49 percent of currency usage.
This ratio has since fallen to around 5 percent following the depreciation of the rand to a low of US$1: ZAR15.
Again, this underscores the need for intensive promotion of other currencies in the multiple currency basket as well as an incentive system to promote the usage of especially volatile currencies such as the rand, to reduce the inordinate exposure to the US dollar.
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