Developments on the interbank market and the fuel market over the last couple of days has revealed that there is minimum sincerity and reluctance on the part of government regards adoption of a purely laissez faire approach to economic management. From partially liberalizing the exchange rate to introducing an interbank market earlier in February, industry and the general populace had been nearly persuaded to believe that government wants to start over again, in a direction that is guided by free market principles. A market based economy is without excessive government controls in trade and has negligible subsidies among other characteristics. A command economy on the other hand is typically characterized by price controls and pegged exchange rates. Although there have not been outright price controls in Zimbabwe since dollarization, the emergence of a wired currency now known as the RTGS$ midway into dollarization resulted in pure value variance between this “pseudo” and hard currency which however government suppressed up until February 2019.

The costs associated with a forced government hand on the market have been clearly visible for all to see. To maintain the 1:1 exchange rate, government went beyond its means to borrow on the open market, funding activities such as command agric, which was highly subsidized. It also set unfavourable retention ratios for exporters given the fixed exchange rate and these funds were used to cover subsidized fuel, electricity and all other forms of imports. Resultantly government’s own debt was bloated, while exporters began to scale down production. The borrowings, stimulated money supply to levels untenable when comparing the relative ratios of USD balances to the RTGS$. Although the official exchange rate was maintained at 1:1, private players in trade began to factor the variances in supply to come up with an exchange rate. The major challenge was that the growth in money supply meant excess liquidity in RTGS$ terms and increased demand for forex to satisfy imports. The formal market thus began to realise a depletion of USD balances as bad money chased away good money, resulting in huge foreign payments backlog and production disruptions across industry.

The liberalization of the exchange rate in February 2019 was seen as the most significant move government has undertaken in recent years in pursuit of realigning the economy on a market driven path. This move, pursued in honest, would have gradually reduced market excesses while improving the efficient allocation of forex. Earlier indications from the interbank shows that government did not cede control of the market to banks in the first instance as it effectively maintained management of the exchange. As a consequence, volumes remained significantly low while confidence faltered.

For perspective, using 2018 trade data, Zimbabwe demands close to USD$20 million a day to satisfy imports demand. Now the interbank trades averaged below $2 million a session over the last 3 months. Even when compared to exports figures which averaged $12.5 million a day in 2018, the average interbank trades for the first 3 months were very low, pointing to market viability challenges. Importers and exporters however found a way of matching trades through banks in twinning arrangements at market friendly rates outside of the official market. The parallel exchange rate which has always maintained an almost static variance to the official market, exposed the interbank. Industry remained starved of forex for importation of raw materials and capitalization thus sustaining pressure.

Under pressure to address interbank viability challenges, RBZ on behalf of government, went further to cede control of the market to banks, while “dropping” subsidies. Again as the earlier matter concerning the interbank shows, government has been less willing to liberalise the exchange rate. Firstly, for 3 months it retained control of the market and dictated the exchange rate, in turn sellers shied away and the market remained underfunded. In the latest instance, barely a week into the purported full liberalization of the market, a ZERA notice notifying that the reported increase in the price of fuel from the present $4.99 has not been sanctioned, further exposes government. The notice brings to light that Letters of credit remain in place, while subsidies may as well, still be in place. The notice explained that fuel retailers will not be allowed to increase the price of fuel since the fuel they are dispensing has been procured through letters of credit by government at a time when the rate was at 4.6.

There are two possible scenarios, 1 is that either government is going to maintain subsidization of fuel at a new rate of 4.6 from 1:1 or 2, it is waiting for the procured fuel at the 4.6 rate to be fully dispensed and exhausted before new price reflecting the prevailing exchange rate are set. If scenario 1 is the answer then it means subsidies were never removed but adjusted. If scenario 2 is the answer it means government has either way maintained a hand in interbank trading, even as promises of imports settlement through letters of credit may highlight that the $500 million promised injection has not yet fully materialized. Scenario 2 further expose that government’s involvement in the importation of fuel, results in inefficiencies since the product drastically remains in short supply despite the price increase.

Before the notice from ZERA was flighted, and under the assumption that government had stopped subsidies and aiding of imports through letters of credit, my persuasion was that it is counter intuitive for government to liberalise the exchange rate and yet on the other hand seek to impose or control price of a product whose key input is dependent on the fluctuating liberalized exchange rate. Little did I know that that fuel purchases were still facilitated by government if not still subsidized. What we are seeking to answer in all this, is whether government is truly sincere about letting market forces take over in forex markets. So far the deduction is that government’s liberalization of the exchange market has been half-hearted and therefore largely cosmetic although the ideal is not far from achievable.

We shift dimension and focus on the .2 points inter-day cap which is in effect on the interbank. The cap is an allowable ceiling up to which the interbank rate can rise to, in a single session. So it essentially limits the rate of exchange rate growth per session. This is yet another form of control. While it is used elsewhere in markets such as the ZSE where a ceiling of 20% is set per session, the presence of an alternative parallel market makes the ceiling cushion less effective. Players desperate to transact will always prefer the twinning arrangement where forex may be readily available, or the parallel market in respect to small players.

So, although the formal exchange rate will be contained because of the cap, flows on the formal market will remain depressed as is the case presently. Depressed flows degenerate into low imports including those critical for production. There is an argument thrown around by policy makers that forex receipts in the economy are adequate to satisfy demand and that transactable RTGS$ are not as much such that they could attract high USD exchange rate. If this is so, government does not have a reason to attempt controlling markets because principle says market self corrects over time. The true value of currency eventually comes out. Perception is rather dampened by control than it is improved.

There has been a movement towards the right direction in terms of letting market forces take effect in the economy, but government is very cautious, if not scared and the market is reading this. The partial liberalization is an indicator that somehow economic fundamentals are not yet as strong and that confidence is low. If confidence is low, what confidence building measures are being put in place, other than the inflation induced short term fiscus balance. Has there been enough economic and political reforms to warrant sustained economic stabilization and growth. If there is no confidence, even a currency from mars will not survive. While liberalization of currency was critical, government should have ring fenced RTGS balances to certain extend, and redollarised until fiscus consolidation is achieved. Infact the opportunity is still there, it is even better now given that a significant portion of the RTGS balances has been wiped off the system. In essence whichever route government takes, it should be guided by principles and clarity to avoid mixed signals, which discounts the RTGS$, in markets.