RBZ measures will calm markets
The Monetary Policy Committee (MPC) of the Reserve Bank of Zimbabwe (RBZ) held an ad hoc meeting earlier this week to discuss ways to stabilise the exchange rate and prices as well as support macroeconomic stabilisation measures recently announced by the Treasury.
Measures announced by the central bank will further liberalise foreign exchange marketing in the country, which will see the auction only working as a price discovery mechanism, while the interbank will be the major source of foreign currency.
This way, those seeking to buy foreign currency on the interbank will be guided by the auction exchange on their bids for foreign currency on the interbank market where hard currency will be sold at market-determined prices.
There has always been concern in the market, especially among holders of forex that authorities were putting restrictions on the exchange rate under a a sort of managed exchange rate regime, resulting in an overvalued exchange rate.
This sowed reservations among market players and limited their participation while fueling parallel market activities, which had a destablising effect on the entire economy.
Exporters saw this as a direct tax as they did not get the full value of their export receipts despite facing parallel market-indexed prices when they spend the proceeds from the surrender portion.
With the interbank now the main source of foreign currency, and the central bank supporting liquidity on the market through its wholesale foreign currency platform, authorities expect exporters to freely participate in the market and improve the availability of foreign currency.
This development should reduce pressure and propensity to use the parallel market, which puts steep premiums on forex prices and has been at the center of driving exchange rate and price volatility.
Stable market-determined exchange rates on the interbank market, coupled with the availability of forex to match demand, will make the parallel market less attractive, especially given its steep premiums.
Zimbabwe has experienced exchange rate volatility and rapid depreciation of the local currency despite earning nearly US$10 billion foreign currency last year and several billions in FCA deposits, the local currency has continued to fall.
According to the RBZ governor and MPC chairperson Dr John Mangudya, the MPC noted that the prevailing volatility in the exchange rate emanated from both supply and demand side factors.
“The supply side factors reflected the transitory reduction in foreign currency inflows, while the demand factors reflected the sustained value-preservation demand for foreign currency in the economy,” Dr Mangudya said in a statement.
In order to complement the measures announced by the Treasury, the MPC resolved to come up with monetary policy adjustments to help arrest the prevailing volatility.
In its Exchange Control Circular Number 04 of 2023, the bank issued operational parameters on the new foreign currency exchange measures.
According to the circular, banks and bureaux de change shall sell all their foreign currency acquired on the RBZ’s wholesale foreign currency auction to their customers to meet international foreign payments within 72 hours of receipt of funds.
“The guidelines for the wholesale Foreign Exchange Auction System shall remain in place as previously advised in Exchange Control Directive RY002/20233,” the circular said.
Economic analyst Namatai Maeresera said this directive was there to make sure that banks do not hoard foreign currency for speculative purposes.
“This means banks do not stock up the foreign currency and sell it at a later date when the floor price has moved higher, but be able to oil the market with much needed foreign currency as soon as they get hold of it,” Mr Maeresera said.
Writing on his Twitter account, economist and MPC member Persistence Gwanyanya said the RBZ had adequate foreign currency to mop every usable local currency balance in the economy, for instance, assuming a floor price of $5 000.
“Assuming a floor price of US$1: $5000, all usable bank balances of $219 billion can be wiped away by US$43,8 million. Comforting is the fact that RBZ has the required foreign currency to intervene in the market until stability is achieved,” Mr Gwanyaya tweeted.
The new exchange rate laws stipulate that foreign currency on the interbank market is dealt with in a First In, First Out basis. This will offer bidders equal opportunity, health competition and eliminate discretionary decisions.
According to economist Tinevimbo Shave, this is a measure that avoids any fraudulent and malpractices by banks towards the selling of the foreign currency.
“This is a measure which is meant to avoid sabotage by banks to some customers favouring other customers during their administering of the foreign currency acquired by the institutions. This entails that whoever has looked for the foreign currency first will get the money first and avoid preference lists,” Mr Shava said.
Under the refined foreign exchange auction, Dutch Auction, the bid limits have been revised to a minimum of US$ 1 500 and maximum of US$5 000 and this is applicable to both primary and secondary users of foreign currency.
Mr Gwanyanya said this was a way of bringing the informal sector to the party in order for them to participate in the formal channel.
“The widening of Dutch Auction limits to US$1 500 to US$50 000 from US$2500 to US$20 000 is seen as accommodating the informal sector,” he wrote on his Twitter page.
Mr Gwanyanya said on his Twitter thread that a return to stability was quite possible based on the new measures taken.