The Reserve Bank of Zimbabwe (RBZ) has liberalised the US dollar exchange rate against Real Time Gross Settlement (RTGS) balances, bond notes and all currencies in the multi-currency basket, as it seeks to formalise trade in foreign currency.
Delivering the eagerly awaited 2019 Monetary Policy Statement (MPS) yesterday, RBZ Governor Dr John Mangudya said the move would bring sanity in the foreign currency market, promote exports, boost Diaspora remittances and investments, eliminate multi-tier pricing, as well as preserve value of local forms of money.
The RBZ introduced bond notes in 2016, as an export incentive and pegged the unit of the surrogate currency, as well as electronic dollars at one to one with the US dollar, but shortages resulted in the market disregarding the parity policy and ascribing high premiums on the greenback.
Wild swings in parallel market exchange rates in the last quarter of last year spawned a spike in prices of goods and services, propelling monthly and annual inflation rates to record levels since dollarisation of the economy in February 2009.
As such, the central bank will with immediate effect establish an interbank foreign exchange market to formalise trade in foreign and local currencies through banks and bureau de change on a willing buyer willing seller basis.
This entails denominating the existing RTGS balances, bond notes and coins in circulation as RTGS dollars to establish an exchange between current monetary balances and foreign currency.
Dr Mangudya said to get the US dollar equivalent of current RTGS or electronic balances, the prevailing market determined exchange rate will apply.
“This will bring fairness and transparency in the distribution of foreign currency,” Dr Mangudya said, adding that the policy measures were intended to formalise what was already happening on the parallel market which the bank had no control over.
To anchor exchange rate stability, Dr Mangudya said the RBZ will aggressively intervene in the market to sterilise liquidity so as to help contain inflationary and exchange rate pressures.
Zimbabwe has $1,8 billion usable RTGS balances out of a total of about $10 billion.
The remainder is tied up in Treasury Bills, RBZ savings bonds and loans to public sector and private borrowers.
The RTGS dollars will become part of the multi-currency system and a legal instrument which amends the Finance Act of 2009 which pegged the US dollar at par with bond notes and RTGS balances, has already been prepared and will be gazetted soon.
Dr Mangudya said the bank had arranged sufficient lines of credit to maintain adequate foreign currency to underpin the foreign exchange market.
He said foreign currency from the interbank market shall be utilised for current bona fide foreign payment invoices, except education.
“All foreign liabilities or legacy debts due to suppliers such as International Air Transporters Association (and) declared dividends shall be treated separately after registering such transactions with the exchange control for the purposes of providing the bank sufficient information that will allow it to determine the roadmap for orderly expunging of the legacy debt,” Dr Mangudya said.
The RBZ will continue to provide foreign currency for the importation of critical commodities such as fuel, electricity, medicines and water chemicals through existing letters of credit facilities and the foreign exchange allocation committee.
Dr Mangudya said significant shifts in economic fundamentals during the last quarter of last year saw parallel market foreign currency premiums increasing from between 1,4 and 1,8 to the US dollar to current levels of 3 and 4.
This increase in foreign currency premiums had negative pass through effects on annual inflation, which rose from 5,4 percent in September last year to 56,09 percent in January this year, Zimbabwe’s highest inflation rate in nearly a decade.
“In this respect, continuing to use the US dollar as a unit of account, when its value has drifted away from the value of the RTGS dominated money supply has brought forth a number of challenges,” said Dr Mangudya.
“The challenges include multi-tier pricing by business, speculative pricing, loss of Government revenue, valuation and accounting difficulties, asset liability mismatches and negative investor confidence.
“The current monetary arrangements if maintained could pose the risk of costly redollarisation of the economy, which will move the economy into recession. This is evidenced by the fact that some businesses are already gradually reducing prices due to low demand in the economy.
“Moreover, some of those charging in foreign currency have also been experiencing reduced demand for their products and are thus reverting to pricing in RTGS and bond notes.”
Dr Mangudya said exporters on the other hand were fast becoming uncompetitive, as the export incentive scheme had been eroded by the forex premiums induced inflation.
Bureau de change will be allowed to purchase foreign currency without limits, but will be limited to sell hard currency for small transactions up to a maximum daily limit of US$10 000 per institution.
To allow exporters to benefit from the interbank foreign currency market and to promote uninterrupted supply of forex in the economy, the central bank increased foreign currency retention thresholds for some of the exporters.
Retained export receipts shall be utilised within 30 days, after which the unutilised export earnings will be offloaded into the market at the prevailing market exchange rate or critical imports and external payments.
Dr Mangudya said the measures were also aimed at increasing demand for domestic forms of payment and to preserve foreign currency for external payments that include essential imports.