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Persistence Gwanyanya

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 the 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 June 1, 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 $4,2 billion and $3,57 billion 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 standardised surrender ratio of 30 percent.

To be continued . . .

Persistence is Economist, Chartered Banker and Trade Finance specialist. He is also the founder, Futurist and Vision Consultant of Billiion Group. For feedback email [email protected] or whatsApp +26377 3 030 691