Unpacking the January 2021 Monetary Policy Resolutions
Whilst necessary in a transitioning period, the amendments to and in some cases completely new monetary policy measures by the Reserve Bank of Zimbabwe (“RBZ”), would suggest a preponderance of policy inconsistency, if not properly unpacked. As such, full understanding of our economy especially its structure and, of course, the journey that it travelled to shape this structure by mainly policy makers, analysts and journalists who are often in the forefront of articulating economic policies to the common men in the street is vital. This way you may understand why policy measures may not always need to be popular but for the greater good of the economy.
Since Smith regime, Zimbabwe has always relied on Exchange Control regulations to manage its resource dependent economy. The common belief that these natural endowments are only commanded to our care by the Creator, and therefore should benefit many rather than a few, could have been the key motivator for the promulgation of Exchange Control Act [22.05] on the 1st of June 1965. This Act confers power and impose duties and restrictions in relation to gold, currency, securities, exchange transactions, payments and debts, and the import, export, transfer and settlement of property, and for purposes connected with aforesaid.
There is consensus that reliance on exchange control regulations helped the Smith and his Rhodesian Front Government to survive the vicious United Nations (“UN”) sanctions during the UDI period. Just like in Zimbabwe today, exchange control regulations were necessary to manage the scarce foreign currency in an internationally isolated and resource dependent Rhodesian Front. That Zimbabwe failed to keep pace with the industrialisation drive to move its economy up the value chain and effectively diversify away from the primary sector, hence increased reliance on command economic models typified with allocation of resources particularly foreign currency by state, is regrettable.
Due to the structure of our economy, with more than sixty (60 percent) of foreign currency generated from exports, from which more than eighty-five (85 percent) is contributed by a narrow range of five commodities namely gold, platinum, chrome, diamonds and tobacco, well thought out Exchange Control Regulations supported by a more functional foreign currency market are necessary for increased supply and greater accessibility of the scarce foreign currency by especially producers of essentials. With the current structural makeup of the economy, it appears the only potent variable at RBZ’s disposal to manage the supply and accessibility of foreign currency is the statutory surrender requirement, which is the proportion of foreign currency exporters compulsorily sell to RBZ at the stated exchange rate. RBZ has always relied on the surrender requirement to increase supply and therefore accessibility of foreign currency.
It is always advisable for policy makers to base the decision on optimal exchange rate on the tradeoff between higher surrender requirements and need for longer retention period, which is the period an exporter can hold the remaining foreign currency before being required to liquidate the same by RBZ. Normally this tradeoff is taken care of by an efficient price/exchange rate discovery mechanism. That’s why modern economies such as South Africa, which, like Zimbabwe, is also commodity dependent, are comfortable with the regulation to liquidate the full amount of foreign currency into local currency (Rands for South Africa) upon receipt of the same. However, where price discovery has been inefficient, like in the case for Zimbabwe, the tendency by exporters is to privatise the foreign currency as they feel its not correctly priced by the market and are concerned about challenges to access foreign currency when they need it. This only means surrender measures are more effective if supported by a more functional and efficient Foreign Currency market. Its comforting that the recently established Foreign Currency Auction system is promising to deliver this.
To put the argument on the current need for RBZ to rely on surrender requirements to increase supply and, therefore, accessibility of foreign currency into perspective, the 85 percent or so contribution by the five major export commodities to the 60 percent proportion of exports to total annual foreign currency earnings calculates to about 51 percent of the total annual foreign currency earnings. Assuming average annual foreign currency flows of around $7 billion for 2019 and 2020 gives average annual export earnings from exports and the five major foreign currency generating commodities of $4.2billion and $3.57billion respectively. Of these amounts, $1.26 billion and $1.071 billion could be estimated as having been racked in by RBZ from foreign currency surrender requirements at the previous standarised surrender ratio of 30 percent. By increasing the surrender requirement to 40 percent, the simplistic projection, and, off course, as dictated by the structural make up of our economy, is that flows of surrender money to RBZ would increase to $1.68billion, with $1.438billion being from the five major commodities, which are produced from God given natural resources as highlighted earlier.
As has been observed for a long time now, its very difficult to achieve increased supply of foreign currency from voluntary liquidations (after surrender requirements) by the few major generators of foreign currency as they are also major generators of local currency. At the current exchange rate of US$1:$82.0833 (19 Jan-28 Jan 2021), surrender liquidation by these major foreign currency earners calculates to $117.215billion, which is close to the estimated total revenue of $137billion generated by the Government in 2020 and 28 percent of 2021 budget of $421billion. Clearly, there is no incentive for exporters to liquidate their foreign currency retention, especially when they can use US$ for local transactions such as payment of wages and local supplies in the current dual currency regime. This just strengthen the argument for increasing reliance on foreign currency surrender requirements by RBZ to grow the supply and accessibility of foreign currency by the market.
However, at the current level where exporters seem unhappy with the interbank rate, which according to them is still lower than US$1:$90-100 that they are currently accessing from matching or twinning arrangements, there is need to consider incentives to exporters to compensate for perceived loss in value from increase in surrender requirements under what they consider “suboptimal” exchange rate. Its therefore unsurprising that RBZ had to extend indefinitely the retention period from 60 days after receipt of foreign currency. Otherwise there is high risk of losing foreign currency through transfer pricing, reinvoicing and even disinvestment.
Whilst it would appear that the average weekly foreign currency inflows from surrender requirements of $32million are enough to meet the average weekly Foreign Currency Auction requirements of around $30million, the seasonality nature of these inflows make it very difficult to manage currency volatities. Cashflows from surrender requirements normally dip in the last quarter of the year to the following year as tobacco marketing seasons ends in August and as mining sector, especially gold, earnings dwindle on account of the annual shutdown and rains, which affect mining operations. Demand for foreign currency normally peaks up during this period as we seek to import agriculture inputs and support our agriculture sector. In the past we used to rely on the Afreximbank facilities to smoothen this cashflow gap, but this option is now discouraged as this commercial facility has proved to be very expensive at a cost of around 7 percent per annum.
Recent efforts by RBZ to turn the curve by agreeing with banks to advance foreign currency to customers allocated by the Auction system against future surrender liquidations immediately after allocation as part of their financial intermediation is commendable. It is concerning that whilst the market battles with foreign currency shortages exporters and other generators of the scarce resource have been sitting on $1.1-$1.3 billion for a long time. Similarly previous measures by RBZ to extend the surrender requirement to domestic sales, which under dual currency regime, are essentially domestic exports, like earnings from tourist activities, are proving to be helpful. The same applies to recent measures that require the Government to sell foreign currency from mainly taxes, duties and levies to RBZ to beef up supplies into the Auction system.
Despite these measure there was still pressure on foreign currency owing to delays in settlement on account of high exposure to US$. Faced with US sanction every small US$ arising from Zimbabwe or Zimbabwe linked institutions and individuals, has to go rigorous scrutiny in the US financial system. As such it is advisable for our financial service sector to reduce exposure to US$ by encouraging customers to insist on non US$ invoices from their trading partners, and, by extension, for RBZ to collect surrender liquidations in currency of invoice. Currently it appears all surrender liquidation and hence supply into the Auction System are in US$, which exposes us to US risk. More than 95 percent of foreign currency transactions in Zimbabwe are in US$.
Its important to emphasise that all the recommended measures are short term and, due to the structural nature of our challenges, only permanent solution can lift the Zimbabwe economy from its deep seated structural challenges. Re-industrialisation is seen as a permanent solution to our currency challenges due to its potency in lifting our economy up the value chain as well as diversifying it away from an primary to the secondary sector.
Whilst its comforting that measures to deal with structural challenges are well articulated in National Development Strategy 1, implementation remains key.
Other MPC resolutions of 08 January 2021 shall be discussed in my next instalment.
Meanwhile let me take this opportunity to remind everyone to be extremely cautious about the deadly Covid-19 pandemic and take recommended and necessary measures to STOP the spread of the pandemic. There is no need for us to spend time and energy in analysing and therefore proffering advice on the economy when all of us are going to be dead
Persistence is Economist, Chartered Banker and Trade Finance specialist. He is also the founder, Futurist and Vision Consultant of Billiion Group. For feedback email persgwa@bulliongroup.co.zw or whatsApp +26377 3 030 691
