Scrapping of multi-currency and further monetary policy measures, the implications


    On Monday the government through the Treasury and the Reserve Bank announced major changes in the monetary policy of Zimbabwe, highlighted by the ending of a 10-year multi-currency system.

    Further measures announced include the intended sterilisation of $1.2 billion in RTGS funds. Sterilisation is the neutralisation of of RTGS balances to the USD balances in Zimbabwe’s financial system. These  $1.2 billion are balances in RTGS$ held by banks due to foreign creditors and investors among others. These amounts have accumulated over a 3-year period from around 2017 and owing to hard currency challenges could not be remitted. On introducing the RTGS$ and a partial float exchange rate in February, the Central Bank promised to settl all foreign dues incurred during dollarisation at 1:1. This means banks will now have to transfer the amounts in RTGS$ whereas RBZ will settle them to external creditors at 1:1 through a revised scheme.

    Implication: The policy measures will have an immediate impact of lowering the quantum of RTGS$ balances in the banking system. The amount of RTGS deposits will thus diminish grossly thereby strengthening the RTGS$ on the forex market, all else being equal. Despite the RBZ promise of 1:1 these deposits were competing for forex on the interbank and some investors were willing to take a shave. The exact amount of transferable deposits is however not known in the market. The Treasury and the RBZ has previously said the amount is below RTGS$2 billion.

    On the downside, it is evident that sterilisation will result in additional debt for the country and worse still in foreign currency. The RTGS$ Debt to GDP ratio will thus go above 100%, which means our capacity to service to debt will be significantly low. Given the high leverage, the ability to attract lines of credit will equally be low. This is the second time government assumed private sector debt under 10 years. Payable interest on the due amounts will further burden the fiscus and if fundamentals do not improve at a quicker rate, may result in further fiscal misalignment.

    Adjustment of interest rates from an average of 15% to 50%.

    Implications: Interest rate relate to the cost of borrowing. A revision of the interest rate is meant to realign the rates in line with inflation. Typically if banks are lending at below inflation levels it implies that their net return is negative. There will therefore be no incentive to lend. Borrowers on the other hand will maximise their return if they borrow at lower rates in an inflationary environment. An adjustment upwards thus reduces the propensity to borrow while realigning lenders return.

    On a more pertinent note, Zimbabwe’s banking sector has struggled with NPLs in numerous instances. In 2016 the NPL ratio for the average banking sector reached as high as 24%. A mop up exercise through ZAMCO however helped bring down the ratio to a low of 8% as at December 2018. Even before the new higher interest rates, high NPLs had resurfaced and this will become a serious threat for the sector viability going forward.

    To government it equally means its cost of borrowing will go up. Given the extended monetary latitude it follows that Treasury will be more active in attempting to stimulate the economy which is now in a recession. Government expects a trade deficit of about $2.8 billion by year end which is at the same level to last year. This projected deficit means government expects to borrow an equivalent amount of circa $2 billion from the market and given the higher revised interest rates in the market, the net impact is a quicker growth in money supply through higher interest payments.

    Removal of cap on margins on the interbank rate and administrative limits on the Bureau De Change.

    Implication: This is one of the most important measures promulgated by the RBZ. The imposition of caps on margins which essentially means the limitation of daily interbank rates through imposition of a ceiling, reduced the attractiveness of the interbank. By imposing a rate cap, RBZ was discouraging market forces but at the same time was attempting to manage a runaway exchange in light of low confidence in the market. The removal of a cap means the exchange rate can now freely move without interference. Sellers can now offer at any price and if bidders are willing, trades will be recorded without hindrances.

    Circuit breakers gave rise to off market trades and inspired the black market which was now trading at 100% ahead of the official exchange. Exporters and importers were now matching off the market with the facilitation of banks. Liquidity on the interbank thus remained low averaging a measly $1.9 million compared to demand of over $10 million per session. There will however be a shock in the official market with rates initially running to as high as the parallel rate before coming off to levels below 8 with more downside pressure. Liquidity on the interbank will thus improve from present averages, while the 2 exchange rates will largely come close to each other.

    RBZ has put a vesting period of 90 days on disposal of dual listed shares purchased by investors on the ZSE

    Implications: There are particularly 2 key stocks traded on the ZSE which are dualy listed and these are Old Mutual and PPC. The shares of both counters are also traded on the JSE in South Africa, where they have a primary listing. Due to their dual listing their shares can move between markets such that a share purchased in Zimbabwe can be sold on the JSE vice versa. Given the forex shortages in Zimbabwe investors were taking advantage of the fungibility to buy Old Mutual shares in Zimbabwe and then sell them in Joburg (JSE) as a way of moving funds from Zimbabwe to other countries. The key challenge with this move is that it gave room to arbitrage and speculation. It also gave rise to the share price due to increased demand and as the share price rose in Zimbabwe given a stable JSE price, the implied rate (OMIR) kept going up. As a proxy for the exchange rate the resultant rate would grossly inflate the USD exchange to RTGS$. Increasing the holding period over which one should hold before selling in another market reduces speculation and trading activity in those respective counters, thus lowering the exchange rate, all else being equal.

    Increasing the supply of forex on the interbank by ensuring that at least 50% of the surrender portion of foreign currency is sold to the interbank market, supplemented by Letter of credit for essential imports.

    Implications: A commitment to increase the supply of forex on the interbank through retained forex from exporters, is welcome. However there is no mechanism to measure the Bank’s sincerity in that respect. It is evident that government has its own demand and as the purse shrinks priorities will highly compete for resources. The second part which addresses the aspect of Letters of Credit has dual implications. First supporting of key imports, which essentially have a high weight on the import basket, frees up interbank funds through reduced demand. This therefore implies a firming RTGS$ or Zimdollar to the USD.

    The downside remains that most LCs lock a forex price and therefore if the exchange rate move upwards government lose as it has to pay the difference between the market rate and the locked price. When such a result comes it means government will be sustaining subsidies in some instances. However, given that low volatility will be expected, the level of subsidy will be manageable. Overall prices (inflation) will take time to come down. Prices are generally sticky downwards and in a month and half’s time prices will follow an emerging exchange rate.

    In concluding there are other pieces to the currency equation whose behaviour is key in achieving a stable currency. confidence has been a missing part of the puzzle, as Zimbabweans do not trust the government due to yesteryear experiences and high levels of corruption in government. the huge political rift remains unattended to and this has been one of the major challenges impacting confidence. a political settlement which unites the country will help inspire confidence in government. Another key aspect is that of weak macro economic fundamentals. government spend is not yet in control, high debt levels and outstanding legacy arrears deter foreign capital. it is important for government to acknowledge the shortcomings of relying on a revised GDP level premised on exchange rate movements between the RTGS$ and the USD. The inflated RTGS$ GDP sanitises all key ratios such as deficit/GDP and Current Account to GDP levels. The economy still has gross structural weaknesses which if unattended to will catch up in a few months thus destabilising the supposed exchange rate which we expect to comeoff in the interim. 

    – Equity Axis News



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