The Sunday Mail
Senior Business Reporter
GOVERNMENT will not de-link the parity rate between nostro foreign currency account and Real Time Gross Settlement (RTGS) account balances by allowing a free float exchange rate system as doing so would send wrong cues, distort the market and drive inflation.
Reserve Bank Zimbabwe Governor Dr John Mangudya declared last week that the central bank, as long as he is at the helm, will never allow a free-float exchange rate determination system. He said doing so would be tantamount to committing economic suicide.
Separation of Nostro, RTGS FCAs
This comes after the central bank directed banks to separate nostro FCA accounts and RTGS foreign currency accounts in what the RBZ governor said is meant to preserve value for exporters and encourage inflow of the much needed forex.
But even after directing banks to separate the accounts, in bold measures expected to strengthen the multi-currency system and increase inflows from exporters, the Diaspora, portfolio investors and international organizations; the central bank chief said nostro and RTGS balances will continue to rank equal, that is at a one to one ratio.
Dr Mangudya also stressed that he had secured $500 million from Afreximbank for nostro FCA accounts stabilisation. This means that security and ready availability of funds held in all nostro FCA accounts is guaranteed.
Nostro accounts are bank accounts held by local banks in foreign jurisdictions for settlement of external obligations.
What necessitated the separation
“The purpose of doing that is to ensure that we preserve value for money for those who are exporting. We want to ensure that for those who are exporting, that money does not mingle with non-export money. The goose that lays the golden egg in this economy are exporters, Diaspora remittances,” the RBZ governor said.
The central bank chief said mixing the two has had the effect of discouraging and de-motivating those bringing in foreign currency.
“When we dollarised, the quantum of money from the RTGS was low and could not dilute the foreign currency. However, over a period of time, we increased the electronic dollars and it has been reducing the motivation for those with their own foreign currency,” said Dr Mangudya said.
No free-float exchange rates
In response to why Government could not let market forces determine the exchange rate between the bond notes and RTGS account balances held by banks, Dr Mangudya said allowing free-float exchange rate system would be catastrophic.
“We are working on the pre-requisites in this economy for a currency reform agenda; that would be suicidal. Let me repeat, it would be economic suicide for this economy if the Government of Zimbabwe was to do that (free-float exchange rates),” he said.
“That would mean overnight, people will offload their RTGS balances and purchase the little foreign currency that is on the market. It will bring distortions in the market and prices will go up overnight. By doing so, it will be inflationary and you are going to ask for higher salaries and at the end of the day, we will have spill over effects.
“I will never agree with people who suggest that approach,” said Dr Mangudya.
This comes amid indications that the exchange rate between the US dollar and RTGS money has just vaulted to 250 percent, as foreign currency shortages continue to beset the economy.
The speculative spike in parallel market rates has already triggered price increases.
Finance and Economic Development Minister Professor Mthuli Ncube said fiscal imbalances, caused by excessive Government borrowing, had seen Treasury’s domestic debt hitting US$9,6 billion from just US$2,75 billion in 2012.
This phenomenon has fuelled producers’ demand for foreign currency. The astronomic growth in demand for forex has not been matched by equivalent growth in foreign currency inflows, which however expanded 36,6 percent since January to US$2,47 billion.
Prof Ncube also revealed that by the end of August this year, Treasury Bills, which Government has used to fund budget deficits, had grown to a cumulative US$7,6 billion, up from US$2,1 billion in 2016.
As such, this had seen domestic debt increasing exponentially from US$275,8 million in 2012 to US$9,5 billion, against an external debt of US$7,4 billion, bringing the total public debt to US$16,9 billion.
Harare based economist Mr Andy Hodges this week commended the Government on its pledge to whittle down unsustainable public expenditure, which over the years has spawned the fiscal imbalances.
“The minister and the Reserve Bank acknowledge that Government expenditure has been too high. It is clear that Government has to tighten its belt. This why the President is talking about austerity measures,” Mr Hogdes said.