The Sunday Mail
Business Reporter
The Reserve Bank of Zimbabwe last week announced a raft of measures that are meant to mitigate the devastating impact of the coronavirus on the Zimbabwean society and the economy.
This comes at a time when policymakers globally are implementing a raft of stop-gap measures to ease the impact of Covid-19.
The new measures the central bank introduced, which include pegging the exchange rate and reducing the bank rate, come at a time the pandemic has ravaged economies and left many economic activities at a standstill.
Several countries across the globe have gone into lockdown, which has restricted production and distribution of goods and services.
Key economies that are Zimbabwe’s biggest trading partners, China and South Africa, are currently reeling from the effects of Covid-19, and the latter is now under a 21-day lockdown which started on Thursday night.
The actions that are being taken across the globe will, thus, have significant impact on economies, Zimbabwe included. A snap survey conducted by the Confederation of Zimbabwe Industries (CZI) indicates that 46 percent of local manufacturers have already had their supply chains disrupted.
The CZI survey also reveals that local manufacturers import 36 percent of their raw material requirements from South Africa and 21 percent from China, meaning disruptions in economic activity in those countries will be felt locally.
It is against this background that the central bank had to intervene and “mitigate the devastating impact of Covid-19”.
One of the key measures that the central bank had to take is to allow those with free funds to be able to use them to pay for local transactions. Using foreign currency for local transactions was outlawed in June 2019 in favour of a mono-currency, driven by the local dollar.
Under SI 142 and SI33 of 2019, those with free funds were directed to first convert their foreign currency into the Zimbabwe dollar before making any local payments.
However, last week’s measures make it legal to settle local bills in foreign currency.
The RBZ said the intervention “takes into account the country’s limited access to foreign finance, which is adversely affecting the country’s balance of payments position.”
Unlike other countries, Zimbabwe, which suffers from a huge debt overhang and restrictive sanctions, is unlikely to receive financial support from the billions of dollars set aside by the World Bank and the International Monetary Fund (IMF) to help economies lessen the impact of Covid-19, according to the IMF representative in Zimbabwe, Patrick Imam.
This is what prompted Government, through the RBZ, to allow businesses to tap into free funds available in the country. Under the previous regulatory regime, it was easier for those with free funds to withdraw hard cash and exchange it for local dollars on the parallel market or spend the bulk on the informal market, leaving critical businesses scrambling for the few dollars from the central bank.
The latest move will, however, allow formal businesses to generate their own foreign currency and reduce their dependency on the central bank or the dry interbank market.
The RBZ also said the dispensation to use free funds “will also promote social distancing as banks will be able to provide digital financial services to their customers that include producers of gold, tobacco and cotton, and recipients of Diaspora remittances.”
What this means is that instead of tobacco producers, for example, having to queue to get their US dollar earnings, then go and queue to make purchases, they can now get their forex into bank cards and be able to pay for goods and services without needing physical cash, something they could not do under previous regulations.
The lockdown will also mean movement of physical notes will be restricted.
Gold producers will naturally welcome this move as it will quicken payments of their proceeds. Limiting the use of physical cash will also help prevent exposure to the coronavirus, which can be easily transmitted through banknotes. The central bank, however, pegged the exchange rate to be used at 25 local dollars for every US dollar, effectively suspending the managed float exchange rate system that was introduced mid-March.
This means a product that costs $50 will cost US$2. A plus for this measure, according to economist Brains Muchemwa, is that the prices of goods and services are going to come down in USD terms.
He said local prices of imported goods were based on a speculative exchange rate as businesses tried to buffer their working capital.
“The opportunity to sell in USD will re-establish competitive market forces,” he said.
Market analysts, however, questioned the wisdom to peg the exchange rate at 25:1, a rate which could be shunned by those with free funds who might opt to use the parallel market.
Exporters, who surrender part of their proceeds to the central bank, might also feel hard done by the pegged exchange rate, which is at a huge discount to the parallel market rate and might continue to divert export proceeds away from the formal channels.
The central bank claims that the pegged exchange rate will, however, be reviewed when markets stabilise.
In order to support the productive sector activities, especially the winter wheat planting programme, the central bank availed an additional $1 billion.
This is expected to go a long way in making sure funding will not be an issue for the upcoming winter farming season. Zimbabwe is currently struggling to import adequate supplies of wheat, resulting in unprecedented bread prices beyond the reach of many.
If the $1 billion funding is put to good use, the country will make huge savings in foreign currency, not mention the creation of jobs both at farm level and across the value chain, with suppliers set to benefit immensely.
Mr Muchemwa, however, said what will be key to incentivise sustainable production will be a low inflation environment and a predictably rewarding market price for output.
He does not believe the latest measures will have a stabilising impact on inflation or the parallel market exchange rate.
The statutory reserve ratio was also cut to 4,5 percent from five percent, with the central bank saying the move will free some funds to the banks to enhance their lending activities.
Local banks have very low lending books, with the average loan-to-deposit ratio at approximately 36 percent.
The above measure was also supported by the reduction of the bank’s policy rate — or key rate —to 25 percent from 35 percent.
If banks are to follow suit, then it will lessen the burden of their customers that are being adversely affected by the pandemic.
Most businesses have scaled down operations, with some employees being asked to go on leave or work from home.
The partial lockdown put in place by Government means forecast sales and cash will not be met, something which will affect the ability to service loans.
