The Sunday Mail
Persistence Gwanyanya
The Confederation of Zimbabwe Retailers held an indaba on the cash crunch on July 25, 2017.
These indabas have become synonymous with CZR as it tries to contribute to efforts to finding a lasting solution to the cash crunch.
The body invited renowned economist and World Bank Zimbabwe acting country director Dr Johannes Herderschee as the keynote speaker, with Professor Ashock Chakravat and myself as guest speakers.
There was agreement on the root causes of the country’s cash crunch as noted by CZR president Mr Danford Mutashu in his speech. The crunch is essentially rooted in the unbalanced state of the economy occasioned by low levels of production to support elevated consumption. This consumption is largely being satisfied by imports, thus driving illiquidity.
As such, a permanent solution lies in re-balancing the economy through revamping production while reducing consumption of imports.Needless to mention, if left unchecked illicit financial flows will weigh down efforts to address the liquidity crunch.
Panellists pointed out the need to deal with the black market for currencies, and the extension of the parallel market for bond notes into countries like South Africa, Zambia, Mozambique and Botswana.
The existence of arbitrage opportunities offered by the artificial exchange rate for bond notes, which are pegged at par with the US dollar, was singled out as major driver of the black market.
Abandoning the currency peg was discussed as a possible solution to this challenge, but other considerations such as the terms of the Afreximbank facility supporting bond notes are important for more informed recommendations.
Importantly, it was noted that floating the exchange rate for bond notes would not offer a permanent solution as long as production and exports remained low.
It was agreed that Zimbabwe could improve its competitiveness by adopting a weaker currency, preferably South Africa’s rand, as a reference currency. The dominance of the US dollar in transactions is taking a toll on competitiveness.
While usage of the rand as a reference currency would be desirable, the panellists agreed that the joining the Common Monetary Area, in which the rand is the anchor currency, was not viable as it entailed that our monetary policy would be controlled by South Africa.
The preference of the rand was mainly based on the high level of integration between South Africa and Zimbabwe (60 percent). Importantly, this would allow access to South Africa’s capital markets for supply of rands. However, it was noted that policymakers were not warm to this idea as they said Zimbabwe’s challenges were beyond currency issues. It was said during challenging times, the temptation was high for policymakers to force market participants to comply with their thinking.
In any case, the Reserve Bank of Zimbabwe has the necessary tools to do so. It can invoke the Bank Use and Promotion Act or the Anti-Money Laundering Act.
But force does not always yield compliance. Sometimes honest dialogue produces the desired results.
Despite a calculated approach to minimise chaos, the RBZ has shown that it can flex its muscles. Notable incidences include where major retailers do not even own a local bank account and do not deposit their daily takings. Those fuelling the black market for currencies as well as using a three-tier pricing system have also been pursued.
Importantly, the RBZ has resisted the temptation to participate in the parallel market for currencies despite pressing funding needs. Those who lived through the hyperinflation era know what I’m talking about.
Commendably, the central bank has relied on measures such as foreign currency allocation prioritisation and incentives mechanisms to grow money supply.
But panellists noted with concern the limited efforts to solve the cash crunch by other stakeholders. Undoubtedly, with a cash and nostro funding gap of more than US$300 million, illicit foreign currency dealings will be difficult for Government alone to combat.
There is need for increased private sector participation. In the absence of combined efforts, even an increase in bond notes supply will only provide temporary relief to the cash crunch.
What we need is to increase production as a precondition for the reintroduction of a local currency. Clearly, the RBZ has limited capacity to arrange additional nostro lines of credit above the US$70 million, which is being shared by all banks, due to high indebtedness. As such, the private sector should increase its participation through innovative, collateralised, self-liquidating and ring-fenced funding structures.
This will also reduce their business costs as many of these players are sourcing money on the parallel market at exorbitant rates. Increasing exports will offer a permanent solution to the nostro funding challenges.
In addition, we need greater use of electronic money. Regrettably, electronic payment systems are experiencing challenges due to increased system downtime, errors, reversals and duplication. This underscores the need for banks to invest in efficient electronic payment systems and there may be need for the RBZ’s intervention by way of standards controls. The central bank should champion infrastructure sharing by expediting introduction of mini POS machines which can be used by several businesses, particularly in SMEs and the informal sector.
Telecoms operators should equally expedite infrastructure sharing to improve network connectivity. The recent downward review of bureaux de change registration fees encourages participation in the formal trade of currencies.
Increased access to approved currencies is necessary to minimise the inordinate exposure to the US dollar.
However, there is need to ensure that these forex traders are regulated because they can end up fuelling the parallel market as happened before their closure in 2001. The following are CZR’s recommendations:
Revamp Zimbabwe’s production through adopting appropriate policies to attract and retain capital, both foreign and domestic; Adoption of the rand as reference currency would be a desirable option to increase competitiveness, but cannot work in the asence of addressing deep-seated structural challenges;
Strengthen the electronic payment system through investment in efficient infrastructure as well as driving the idea of infrastructure sharing, especially mini POS machines;
Improve network connectivity by expediting electronic sharing in the telecoms sector;
Reduce public sector expenditure through engagement. This should be complemented by bold action to privatise some parastatals that continue to drain the fiscus;
Manage the black market for currencies through an incentive system to formalise;
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