Part 1 - Zimbabwe-Establishment-of-an-Inter-Bank-Foreign-Exchange-Market-to-restore-competitiveness

Posted on 21 February, 2019 by Tjiyapo Velempini

The Zimbabwe Reserve Bank (RBZ) announced the First Monetary Policy for the year 2019. The title of the policy in itself sets the main agenda for this strategic policy intervention. Zimbabwe has been grappling with a crippling Monetary Policy Gap for a long time now; and it’s a good indicator that the Apex Bank has found it very wise to bring sanity to the Banking Foreign Currency Sector.

The major highlights of this policy announcement are as follows:

1. An 87.6% increase in Foreign Currency (FCA) Nostro Accounts deposits from US$240.5 million at the beginning of October 2018 to US$451.2 million as at 31st January 2019. Evidently the separation of accounts to Local & Foreign Currency accounts has been very effective.
2. The foreign exchange premiums on the parallel market which ranged from 1.40 to 1.80 to the US dollar in September 2018 have increased to the current levels of between 3.00 to 4.00 to the USD. This has had a negative effect on the rate of inflation which is currently hovering Year on Year at around 43%.
3. Multi-Tier pricing system largely at play in the market using RTGS / Electronic Transactions, Mobile Money, Bond Notes (Cash), and Foreign Currency (Predominantly USD Cash) payments. According to the RBZ "The challenges bedevilling the economy include the multi-tier pricing by business, speculative pricing, loss of government revenue, valuation and accounting difficulties, asset-liability mismatches and negative investor confidence". This pretty much summarises the state of the nation and economy.
4. Evidence shows that local business drifting towards more RTGS / Bond Transactions whilst exporters are now suffering from uncompetitive pricing due to currency distortions and presumably currency (Local & FCA) flow inconsistences.

The envisaged major outcomes of the Monetary Policy:

1. "To establish an inter-bank foreign exchange market to formalise the selling and buying of US$ through banks and bureaux de change". This was a long overdue intervention. Now people and business can reengage Banks / Financial Institutions for bonafide transactions instead of touts in the streets.
2. "Promotion of exports, diaspora remittances and investments for the good of the national economy". A noble aspiration given the need to create jobs and broaden the taxation base through the production of local goods and services.
3. The establishment of an inter-bank forex market within the context of the current national payment systems made up of RTGS, mobile payment platforms, point of sale (POS), bond notes and coins". Meaning that the various forms of payment mediums will be acceptable in the trading of Local and Foreign Currency.
4. All trades to be done on a "willing-buyer willing-seller basis through banks and bureaux de change".
5. The RTGS dollars immediately "become part of the multi-currency system in Zimbabwe. The legal instrument to give effect to this has been prepared" This is a new currency based on the National RTGS Payment system and could be equated to the principle that gave rise to the famous crypto currency (Bitcoins).
6. “The RTGS dollars shall be used by all entities (including government) and individuals in Zimbabwe for the purposes of pricing of goods and services, record debts, accounting and settlement of domestic transactions”. This statement intimates that the RBZ has created a defacto Zimbabwean Currency. This has serious implications since budgets were initially done using the USD and will now have to be redenominated in the new currency. Therefore the government should immediately workout exchange rates for transacting government business. This also effectively removes the need to pay in Foreign currency for government services including taxes.

7. The Reserve Bank of Zimbabwe (RBZ) will retain control on some sectors of the economy and such transactions such be subject to RBZ oversight and processing in:

1. Education
2. Legacy Debt to International Air Transport Association (IATA), Company declared dividends
   3. Foreign currency requirements for Government expenditure and other essential commodities that include, fuel, cooking oil, electricity, medicines and water chemicals.

This is not a very good development as it puts the RBZ at the centre of the major transaction drivers of the economy. Further discussions on this aspect of the policy are urgently needed. They have the capacity to derail the whole initiative given their centrality in running the country.

8. “Banks & Bureau De Change shall report activities of the inter-bank foreign currency market to the Bank that shall closely monitor the foreign currency trades on a daily basis using the form and format stipulated by the Bank”. That is a bit retrogressive and we should be harnessing the power of technology so that an ONLINE REAL TIME monitoring system is developed and implemented post haste.
9. “Bureaux de change shall be authorised to purchase foreign currency without limits but shall be limited to sell foreign currency for small transactions such as subscriptions, business and personal travel up to a maximum aggregate daily limit of US$10 000 per bureau de change”. This is a welcome development that will encourage new and modern investments into this sector and the daily limit looks reasonable as it relieves pressure from the main banks and allows for financial inclusion.
10. Export retentions by the RBZ should not be encouraged at the moment. The Exporter should be able to get 100% retention and trade their forex with the bank for local currency. The Government should then procure the Foreign Currency from the banks at the prevailing rates. The retentions as tabled are some form of taxation that make the resuscitation of industry and farming the more difficult.
11. “Similarly, in order to enhance liquidity within the foreign currency market, exporters shall be entitled to utilise their retained export receipts within 30 days, after which the unutilised export receipts will be offloaded into the market at the prevailing market exchange rate”. This statement is not progressive since the accounts are already separated into FCA and Local Currency. The RBZ should encourage banks to create two interest rate regimes for FCA and Local Currency deposits / savings. So that people can bring in more Foreign Currency and retain it until they need to liquidate into the local market. That’s the essence of the Interbank Market on Foreign Currency.

This brings us to the end of Part 1 of welcome my analysis and I will be analysing the second and third parts of the statement later. In the meantime your comments / debate on the above are welcome.

Writer - Tjiyapo Velempini - An experienced Information Technology Infrastructure Consultant with a demonstrated history of working in Public Administration and Public Utilities. Highly Skilled in Business Process Re-Engineering , Budgeting, Risk Management, and Business Analysis. A Strong Engineering Professional with a Master of Science in Information Systems Management Degree focused in Information Technology from the University of Liverpool. Linkedin - https://www.linkedin.com/in/tjiyapo/