eBusiness Weekly
Business Writer
The International Monetary Fund (IMF) says Zimbabwe must overhaul the Reserve Bank of Zimbabwe (RBZ) Act to enhance central bank operational independence and eliminate fiscal dominance.
Operational independence and elimination of fiscal dominance mean the central bank must limit itself to the mission of preserving monetary system stability rather than offering to solve fiscal problems.
As part of its 2022 Article IV Consultation on Zimbabwe, the IMF said the Reserve Bank of Zimbabwe and its subsidiaries must cease quasi-fiscal operations (QFOs) and transfer these to the government.
Monetisation of quasi-fiscal operations has in the past “led to a sharp currency depreciation and inflation rise”.
Despite triggering inflationary pressures in the past, the RBZ-financed quasi-fiscal operations have continued, according to the IMF. These operations include advances to state-owned enterprises such as the Grain Marketing Board and the Cotton Company of Zimbabwe, and subsidies to export incentive schemes and gold producers.
The IMF, however, believes ceasing QFOs financed by the RBZ and its subsidiaries and transferring these to the government budget would improve transparency.
The Zimbabwean authorities do not dispute this and have since concurred “that the residual QFOs should be transferred to the budget”.
The IMF also recommended enhancement of the RBZ’s capacity to effectively conduct monetary and exchange rate policy by resolving its large negative net equity position, including by ceasing external borrowings.
According to the global lender, RBZ’s external liabilities have increased significantly over the past two years, which led to the reevaluation of RBZ’s balance sheet and a large negative net equity position.
Forex Auction
The IMF said the foreign currency auction system being run by the RBZ is causing significant economic distortions and as a remedy, authorities should allow further exchange rate flexibility. Zimbabwe has been running the foreign currency auction system since June 23, 2020, allotting more than US$2,998 billion in the process.
The RBZ believes the auction system remains the most suitable mechanism to align the exchange rate with fundamentals “in the absence of a well-functioning interbank market”.
According to the IMF, the authorities argued that parallel market rates are largely driven by behavioural factors rather than economic fundamentals, and thus overshoot the equilibrium exchange rate.
Argues RBZ Governor Dr John Mangudya: “Commendably the exchange rate has been largely stable during the first quarter of 2022. What we need to work on is to continue enhancing confidence in the economy to deal with the portion of the exchange rate premium attributable to behavioural traits that include rent seeking behaviour and hate financial speeches targeting at undermining the use of the local currency and causing despondency. In the recent weeks, the bank has also liberalised the foreign exchange market to allow the trading of foreign currency on a willing-buyer willing-seller basis through the banking system. This is essential to allow for the continuous discovery of the market price for foreign currency.”
This is at the expense of exporters surrendering export proceeds at the official exchange rate. The global lender also said the local currency was overvalued by up to 27 percent in 2021.
“There are growing signs of an overvalued official exchange rate amidst FX (forex) restrictions, which impose large economic costs,” said IMF.
Despite depreciation of the local currency to $150 per US$1 at the last count this week, from $108 per US$1 at the beginning of the year, there is still a significant premium between the auction rate and the parallel market rate now being quoted above $300 per greenback.
This, according to the IMF, has constrained the interbank market from operating at the official exchange rate, “which deters FX (forex) transactions and creates non-price distortions”.
As a remedy, the IMF stressed the need to align the exchange rate to its fundamentals, supported by appropriately tight monetary policy. This can be through “tightening monetary policy further to stem existing inflationary pressures, including through further increasing the policy interest rate and raising reserve requirements”.
The global lender also recommended eliminating exchange restrictions and multiple currency practices as well as minimising export surrender requirements.
On average, exporters surrender 40 percent of their export earnings at the official exchange rate.
“Concerted efforts are needed toward greater exchange rate flexibility by allowing a more transparent and market-driven price process,” reads part of the IMF’s 2022 Article IV Consultation on Zimbabwe.
