eBusiness Weekly
Kudzanai Sharara
The RTGS dollar introduced by the Reserve Bank of Zimbabwe (RBZ) in its 2019 Monetary Policy Statement, has continued to weaken against major currencies as exporters continue to hold on to their US dollar earnings waiting for the exchange rate to slide further.
The Reserve Bank of Zimbabwe scrapped its 1:1 parity policy between local bond notes and electronic dollars last month, and introduced an interbank foreign exchange market which has, however, seen the rate remaining at RTGS$2,5 to the greenback for the first week or so before it gradually started losing value.
By Thursday, the RTGS$ was trading at 3,0013 to the US dollar on the interbank market, 20,05 percent weaker than its start rate of 2,5042. Against the British Pound, the RTGS$ had weakened to 3,9602, from the start rate of 3,2737.
However, activity on the recently introduced foreign currency interbank market remained subdued, with available US dollars falling short of demand.
Market sources said upwards of US$50 million had been traded since the interbank market was introduced. CZI president Sifelani Jabangwe said industry’s ability to access to foreign currency has remained low post the introduction of the interbank market system.
“I don’t have an exact figure, but it (foreign currency accessibility) has been a bit low. The system has taken a bit long to start up because we believe the RBZ did not want the rate to pick up rapidly, whereas the sellers of forex were also expecting a higher rate. Probably now that the rate has now gone to about 3 we expect trades to pick up,” Jabangwe said.
He said the country was not necessarily short of foreign currency amid reports at least US$700 million is held in nostro deposits, but the biggest challenge has been the exchange rate.
“Most exporters will be comfortable with a rate around 3,5 to the US dollar,” said Jabangwe.
False start to the foreign exchange market
Economist Eddie Cross said the reason why the market had a false start was because of the controls the monetary authorities had put in place with regards the buying and selling of foreign currency.
Some of the control measures that were put in place by the central bank include foreign currency retention thresholds seen as too low by exporters, prioritised categories for foreign currency usage as well as a limited 30-day period for exporters to retain forex earnings before being forced to offloaded into the market at the prevailing market determined exchange rate.
“This attempt by the RBZ to retain some form of control over the exchange market is completely wrong, I am in favour of going to a completely free market administered by the private sector,” Cross said in a discussion on Capitalk FM.
He, however, said the RBZ seem to have stopped interfering with the operations of the interbank market hence the movement of the rate on the formal market.
Another economist Brains Muchemwa said the fact that the RBZ had put guidelines on who can access foreign currency means the interbank market will not work.
“You can’t have a market that runs on very strict guidelines, in particular when you are talking about foreign exchange markets, what it means therefore is that this is a controlled exchange rate, the moment you put controls on capital markets it means therefore that money does not flow into the formal system.
“When you look at the volumes that are currently trading on the interbank market today, they are much far less than what should be trading. This economy should be trading at least US$80 million a week.
“So what is important is for policy makers in this country to know that you cannot continue to control the markets for a very long time, it has never worked.”
He said as much as it is important to give guidance when markets fail, in this case it’s not market failure but policy failure. Cross concurred and said priorities (for access to foreign currency) should be set by the market as a way of discouraging corrupt influences, which distorts allocation of resources.
He said if the RBZ is to be involved, “maybe it’s to limit fluctuations, if they have the capacity, which is what reserve banks across the world are doing.”
“I think the RBZ is wrong to try and hold the rate, while they don’t have the resources, . . . the biggest issue is that the exporters have refused to market their foreign exchange at that rate (the 2.5),” said Cross.
Rate to eventually fall
Both Cross and Muchemwa, however, said if fully floated, the rate will eventually stabilise even below the three to one level.
Said Muchemwa: “What is important is to allow the market to discover the price, and let the market do it, that’s what is happening in all the other markets and it’s working.”
He said there is no need to run against conventional economics as that will cause problems such as a thriving parallel market rate.
“If we put all our foreign currency, into the interbank market where it is traded openly and transparently and in a proper market, I believe the rate will come down to settle at three,” said Cross while Muchemwa said the rate can even go below three.
This is in line with what RBZ Governor John Mangudya and Ministry of finance secretary George Guvamatanga said when they appeared before a parliamentary portfolio committee on Public Accounts recently.
Guvamatanga told the committee that authorities are working on a model based on purchasing power parity of consumers and if the forex interbank market rate rose too high, very few businesses could afford to buy US dollars.
“We are expecting the rate on the alternative market will come down,” Guvamatanga said.
“The models we have worked on have shown a lower side of 1,86 and a higher end of 2,53.
“We know between the two of us (with Mangudya), where that exchange rate should be and where it should end but we will allow the market to get there,” Guvamatanga said.
Dr Mangudya said the official exchange rate was expected to change by the time auctions for tobacco, Zimbabwe’s second-largest earner of foreign currency after mining, open on March 20.
“We do believe that before or on
that date the rate will have reached its equilibrium. We don’t believe it will
still be 2,5 (to the US dollar),” Mangudya said.
He maintained that the market would determine the exchange rate, but ruled out a sharp devaluation, which he said would result in a further spike in annual inflation.
