While the ending of the multi-currency system grabbed headlines and became talk of the country on Monday, the rest of the Reserve Bank of Zimbabwe (RBZ)’s intervention to fix monetary policy and end the cost-push inflation driven by the exchange rate might well be more important.
The RBZ has been criticised for its slowness in complementing the fiscal reforms of the Government, highlighted by nine continuous months of budget surpluses, with a 10th about to appear, and near zero increase in money supply. On Monday, the RBZ answered its critics by a flurry of activity, leading with the end of the multi-currency regime, but adding a number of other long-awaited measures.
First and foremost was the decision to allow interest rates to rise, and rise sharply. The central bank made its signal by raising its overnight accommodation rate, what it charges commercial banks, from 15 percent a year to 50 percent a year. By any standards that was a sharp jump, and as a credit squeezes go this should produce a very tight grip.
While the RBZ cannot set commercial bank loans, its own accommodation rate gives a powerful signal, and that signal with its accompanying statement says charge rates more in line with inflation.
Cheap bank loans, with interest rates a small fraction of the inflation rate, have helped fuel the surge in the exchange rate between the RTGS dollar and the US dollar for some months in four complimentary ways.
First net exporters, and they now hold around US$1 billion in their nostro accounts, have been very reluctant to sell these dollars on the interbank market in the obvious hope that they will be worth quite a bit more later on. But most have bills to pay in Zimbabwe, such as wages and taxes, and so have borrowed cheaply to get the cash flow they need.
Secondly, net importers owing money to foreign creditors have been borrowing to buy foreign currency to satisfy at least the most urgent of these debts. Again this is understandable, but puts more demand pressure on the exchange rate. Net importers have also been looking at borrowing to bring forward orders and build up stocks. Again understandable and again putting pressure on rates.
And finally we have the speculators, or investors if you like, who have been borrowing to buy up US dollars, possibly on the black market, to sell later when profits appear. The new interest rate regime makes that more problematic.
The second major move by the RBZ was to assign at least half of the surrendered export earnings to sale on the interbank market. This is serious money, around a quarter the total export earnings and with the exporters’ retained earnings brings the percent of export income available for interbank market transactions to around three quarters.
This is a major step towards the final desired goal of all currency inflows ending up in the interbank market; that is the stage, incidentally, when Zimbabwe will effectively have its own currency, floating in value according to supply and demand, just as everyone else’s currency does. The RBZ is still keeping some control of what is imported, but in the end import priorities cannot be set by fiat although a Government can intervene through fiscal measures, such as allowing necessities in duty free, having modest duties on useful stuff, and imposing crushing surcharges on luxury imports. In the days of the 1-1 fiction the monetary authorities might have had to take control, but as we leave those days the burden needs to move to fiscal measures to ensure necessities are imported at a reasonable cost. The obvious present goal though must be to at worst stabilise the exchange rate and at best strengthen the RTGS, or Zimbabwe, dollar by reducing buying pressure for US dollars and increasing the supply. Economic laws tend to work despite social media.
The bubble in the black market might well grow a bit further before it pops, and the gap between the official interbank market and the black market is now so large that panic must be a major input into the rates set by pavement dealers. But the bigger the bubble the bigger the pop. The third measure by the RBZ was to demand that those importers wishing to benefit from a final one-off legacy deal with the Reserve Bank to liquidate certain approved foreign debts on a 1-1 basis had to ensure their bankers could forward the required $1,2 billion by Friday. Getting more than 12 percent of total money supply out of the system will also reduce demand pressure in currency markets and in inflation.
There are further steps that the RBZ needs to take. There is still what amounts to unofficial dealings in nostro funds with net exporters paying import bills for net importers at a handy mark-up over the interbank rate rather than both parties using the interbank market, the net-exporter selling into the pool and the net importer buying from the pool. The central bank has powers to police nostro accounts and should perhaps use these powers more stringently.
In general, the monetary authorities should be a little less shy and little less worried about accelerating progress towards the desired normal markets. We agree that they have to overcome incorrect perceptions in the public, but results of determined action will help more people accept faster that economic fundamentals have been put right, and all that is now in progress is the cleaning of the accumulated piles of failed past policies.