Digesting 2019 Monetary Policy Statement

24 Feb, 2019 - 00:02 0 Views

The Sunday Mail

Persistence Gwanyanya

It’s quite relieving that after delaying to announce the 2019 Monetary Policy Statement (MPS), the Reserve Bank of Zimbabwe (RBZ) didn’t disappoint.

The apex bank should be applauded for its bold decision to float the RTGS (Real-Time Gross Settlement) amid increasing calls for a market-based exchange rate system.

Whilst Government had since hinted the need to migrate to this system, it appears RBZ was overly cautious to abandon the exchange rate parity (1:1), which it feared could easily be interpreted as an admission of its failure.

Remember, it took a lot of convincing and sacrifice to introduce the bond notes and, as such, any change to the exchange rate parity system should be carefully considered in light of the public resentment, which is likely to accompany it.

Importantly, the economic, legal and social consequences of the migration to the market-based exchange rate needed to be carefully considered before being taken to the market.

Despite being the preference of the market, the market-based exchange rate has its own merits for the country today. The newly introduced inter-bank foreign exchange market, which is indeed a managed float, is accessible to willing buyers and sellers of foreign currency through banks and bureau de change.

With the previous exchange rate mechanism, we all had to depend on RBZ for access to foreign currency, which was hindered by the operation of a suboptimal pricing mechanism.

The operation of the USD/RTGS/bond currency exchange rate parity was blamed for unsustainably subsidising the so-called essentials at the expense of foreign currency generators.

This is why despite the increase in foreign currency earnings to historical highs — of more than $6 billion in 2018 — the country is still struggling with currency instability, yet its regional peers like Malawi — with almost similar population, but low foreign currency revenues of $2 billion — have a fairly stable currency regime. This is because the $3,5 billion or so that was retained by the market naturally found itself on the parallel market in search of economically viable exchange rates.

Its common cause the parallel market was largely fed by desperate corporates who participate in this opaque and unlawful market due to unavailability of an alternative market where they could exchange their forex for viable economic value.

The operation of the inter-bank foreign exchange market is going to release about $3,5 billion, or so, into the market, which is significantly high to support imports of the so-called non-essentials that were not catered for by the forex surrender system in place.

At the current level of around $600 million, against RTGS (usable) balances of $1,8 billion, the country’s available foreign currency can support an exchange rate of $1: RTGS$3. This might have influenced the rate of $1: RTGs$2.5 that RBZ provided banks with seed forex, noting that about 40 percent of RTGS dollars ($720million) is normally required for imports.

An efficiently operating inter-bank forex market shall see significant forex flowing into the less risk and more transparent formal system, which is expected to overtake the alternative market, just like what recently happened in the transport industry when mass public transport system was revamped.

The commuter omnibuses that were dominating the local routes had to reduce their fares to levels being charged by mass public transport system to remain viable.

Strict Discipline

However, it’s imperative to set ground rules for trading so as to minimise market failure like what happened in 2008 during Dr Gideon Gono’s time as the RBZ Governor.

One such rule is to ensure that Government doesn’t participate in this market as it can easily upset the market, being the owner of the printing press.

As such, Government’s import requirements, together with forex requirements for essentials, should be catered under the surrender requirements, which are generating between $2 billion and $2,5 billion per annum.

The maintenance of exchange rate parity (1:1) for access of this forex is strongly discouraged to manage demand for essentials, as well as contain import bill from Government expenditure.

Continued online

Persistence Gwanyanya is a banker, financial and economic analyst who founded Percycon Advisory Services. He wrote this article for The Sunday Mail. For feedback use +263 773030691 or WhatsApp [email protected].

 

The success of the inter-bank forex system depends on how well we shall manage RTGS dollars growth, which is dependent on management of the fiscus.

This is why efforts by Professor Mthuli Ncube to reduce fiscal deficits, which have seen no TBs having been introduced since October 2018, will make a big difference.

The resultant halving of money supply growth to around 25 percent since the said period, is plausible as it helps in managing inflation, which is a key consideration on the proposed plan to convert the maturing RTGs$2,2 billion TBs this year.

Failure to deal with these TBs would result in increased money supply growth, which can result in increased pressure for forex.

Importantly, if the exchange rate is maintained within reasonable levels, even the salary demands will be affordable and manageable as the current prices already reflect the parallel market exchange rate, so inflation will be managed too.

In light of high concentration of forex within few — five — banks, there is need for a mechanism to regulate the inter-bank forex market in a manner that minimise liquidity and solvency risks.

Also important to regulate is the level of participation by different players in the market, as the concentration of RTGS dollars in a few players would mean some corporates have potential to destabilise the market.

RBZ reports that out of the 3,8 million accounts, only about 10 percent have balances of $1 000 and above confirms our fears.

Whilst RBZ’s position to start with settling current invoices is supported, there is need for cooperation with banks for a better understanding of their clients’ cashflows as a way to manage the pressure for foreign currency.

Measures should also be taken to minimise speculative purchases of foreign currency, as well as market manipulation by both customers and banks.

RBZ has to be more proactive and agile to deal with the sophistication of the market. This is why the requirement for banks to start by reporting their trades to RBZ on two-hourly basis is plausible.

It’s comforting that Zimbabwe has an opportunity to learn and perfect the inter-bank market exchange rate system as it is currently in operation in other African countries such as Nigeria and Angola.

However, ordinary people in Zimbabwe have different concerns about the system.

They need to be satisfied on how their savings and salaries will be preserved, especially today when the memories of losses at dollarisation are still fresh in our minds.

Its comforting to note that RBZ mentioned that it shall prioritise legacy obligations to access forex at the rate they were contracted (1:1), and we wait to hear the modalities of this.

Other measures that the Governor mentioned such as forex deposit receipts to preserve value for pensions are seen as attempts to preserve value for pensioners.

However, as we know, it’s hard to come up with a perfect policy and I hope RBZ will listen to the market for improvements in mainly the inter-bank forex market system, as well as preservation of value going forward.

Importantly, as they say, currency is confidence and confidence is currency.

The country should work hard to boost the confidence levels to make the inter-bank forex market system work.

 

Persistence Gwanyanya is a banker, financial and economic analyst who founded Percycon Advisory Services. He wrote this article for The Sunday Mail. For feedback use +263 773030691 or WhatsApp [email protected].

 

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