The Reserve Bank of Zimbabwe (RBZ) this week acted within the confines of the law that establishes it and explains its mandate, when it announced the reintroduction of the 30-day limit for exporters to use or sell on the interbank market their retained foreign currency earnings, and for a good reason too.
It must be stressed that the directive only represented the reintroduction and enforcement of a requirement made when the Zimbabwe dollar was put in place along with the incentives for exporters and producers of exports to retain part of their forex earnings in a nostro account to buy new raw materials.
The 30-day limit had been suspended as part of measures to deal with challenges arising from the Covid-19-induced lockdown.
This intervention was critical in light of the fast-deteriorating black market exchange rate, which prompted the central bank to take drastic measures.
The main reason why otherwise respectable businesses resort to the black market is because they cannot meet their requirements from the interbank market.
And the interbank market is short of foreign currency because exporters neither fully use their retained earnings, nor sell them, preferring instead to hoard.
Notably, as its name aptly suggests, the RBZ is the “reserve” monetary authority of the country and its latest decision falls in line with its mandate to develop and oversee monetary policy for the common good of this economy.
In this context, a reserve bank is normally made responsible for the management of reserves and associated risks. The fact that most foreign currency reserves are held in nostro accounts belonging to private exporters does not exclude this management role from the RBZ’s remit. It still needs to manage the grand total.
The reintroduction of the 30-day foreign currency liquidation period by the RBZ, will enhance liquidity in the interbank market and help slow down the run in the black market exchange rate in the short to medium term, economic analysts have said.
Apparently, the central bank stepped in to address what economists see as potentially damaging and disastrous economic implications that would arise from individual firms holding on to foreign currency for ever, as part of their policy of keeping surplus cash in foreign currency.
RBZ Governor Dr John Mangudya said this week that the bank’s Monetary Policy Committee resolved at its May 22 meeting to reintroduce the 30-day liquidation period with effect from July 1, 2020.
The bank noted last month and was worried by continued depreciation of the black market exchange rate, which the private sector was now using to price their goods resulting in the recent astronomical increases.
If all foreign currency dealings were made through the interbank market, and with the ban remaining on buying currency in that market to hoard or use for capital transfers, then the actual exchange rate would be a lot lower than the black market rate, although probably higher than the present fixed interbank rate.
In this case inflation would still exist, but be a lot lower.
The bank’s MPC is happy with measures the apex bank has taken to curb speculative trading in foreign currency using electronic banking platforms, especially after it caped transactions thresholds through banks, imposing daily and monthly transaction limits on electronic platforms.
It was at the MPC’s May 22 meeting that the decision to impose a maximum foreign currency liquidation or holding period of 30-days was adopted in order to enforce release of hard currency into the market.
The new forex surrender requirement by the RBZ therefore compels exporters to liquidate their surplus or unused foreign currency holdings after 30 days at the prevailing interbank market rate, fixed at $25 to US$1 in March following the Covid-19 outbreak, but the reform of reintroducing the 30-day limit is matched by the promise to open that market.
The sharp depreciation of the local currency, at the instigation of excessive domestic money supply growth against constrained exports on account of the Covid-19-induced slowdown, prompted the central bank to revise the foreign currency retention period.
The policy impact on the exchange rate would be positive in the “very short-term” considering that the medium to long-term exchange rate outlook remains bearish.
Although some have been concerned that the Government, like all governments across the world, has been forced to put in place extra social spending and economic stimulus to cope with the recession arising from the lockdowns and decline in business and trade, it should be noted that the $18 billion economic recovery and stimulus package includes large chunks already in the pipeline for development, especially the agriculture support.
We therefore concur with the Zimbabwe National Chamber of Commerce (ZNCC) that the intentions of the central bank in reintroducing the 30-day liquidation period were “very noble”.
The business lobby group only wants authorities to align the liquidation requirement with a liberalised foreign exchange rate regime to prevent exchange losses to sellers of the hard currency, but in a proper market, supply and demand balance at a price both accept.
And this is not going to be the black market rate, nor regrettably the $25:US$1 rate.
But with businesses getting cheaper official currency for necessary imports, prices can start reflecting reality.