Harare – Zimbabwe has entered its decisive, as the devalued RTGS dollar arrives in the market after Reserve Bank of Zimbabwe Governor John Mangudya announced a raft of monetary interventions to address the country’s economic challenges. 

In his 2019 Monetary Policy Statement (MPS) last week, Mangudya made a U-turn on his earlier 1:1 fixed exchange rate policy undertaking for the US$ against the bond note, a surrogate Zimbabwe currency introduced in 2016 as an export incentive to Zimbabweans. In launching bond notes to Zimbabweans, RBZ claimed that the value of bond notes was guaranteed by Afreximbank one is to one with the US$.

Headlining the MPS is the collapse of the bond note instrument and its replacement with a 60 percent maxi-devalued Real Time Gross Settlement (RTGS) dollar. RTGS dollar is a tradeable Zimbabwe local currency incorporating electronic money and bond notes. Other noteworthy interventions were on liquidity management and foreign currency generation.

Impact of RTGS Dollars to Zim Economy

As a positive to the national fiscus, the introduction of RTGS dollars and adoption of a 60 percent devalued exchange rate for local currency against the US$ will double revenue collected by the Zimbabwe Revenue Authority (ZIMRA) from import duty, all things being equal.

ZIMRA surpassed its 2018 revenue targets after collecting $5,36 billion, buoyed by a recently introduced two percent tax on all electronic transactions. Such revenue collection enhancements will reduce government’s dependence on borrowing to fund its expenditures, in the process addressing the nation’s fiscal imbalances.

This exchange-rate triggered import duty increase will also make imports expensive, in the process promoting local consumption, again, all things being equal and available.

The downside of this increased import cost is its impact on Zimbabwean’s cost of living, particularly for locally unavailable products that are not exempt from paying import duty under the country’s Statutory Instrument 64, an import restriction legal framework.

RTGS Dollars’ Erosive Market Capital Risk

The major economic risk of introducing RTGS dollars in Zimbabwe is to companies listed on the Zimbabwe Stock Exchange (ZSE).

With a market capitalisation of US$19 billion at close of year 2018, with the introduction of RTGS trading, the ZSE risks losing 60 percent of its real market capitalisation value through exchange rate losses. This forecast is guided by five fundamentals, namely, (a) the US$ denominated reporting standards in Zimbabwe as at December 2018 (b) the collapse of the 1:1 fixed exchange rate between the bond notes/rtgs and the US$ through a managed 60% devaluation of bond notes/RTGS  (c) the prevailing exchange rate of 1 is to 4 between the US$ and RTGS (d) foreign exposure to listed entities from accessed lines of credit (5) partially hedged share prices for listed companies.

Foreign Currency Generation Interventions

In the monetary policy, foreign currency retention thresholds were gazetted for various players in the Zimbabwean economy.

Table 1: Current and Proposed Forex Retention Thresholds (Source: RBZ Monetary Policy 2019)

Whilst the upward review of forex allocations to its generators is welcome, what makes this positive intervention vicious is a 30-day ultimatum for one to utilise foreign currency generated after which a bank-rate forex auction will be enforced against you. This intervention fails to acknowledge the basic futuristic fundamentals of the International Financial Reporting Standard (IFRS9) that the nation has adopted. IFRS9 is famed for its enhancement of financial stability due to its forward looking nature of provisions.

Businesses have different operational and forex generation cycles. Performance forecasts are done through potential revenue and cost computations, incorporating exchange rates on the part of foreign sourced raw materials. By forcing businesses to relinquish their hard-earned foreign currency within 30-days, Zimbabwe is pushing foreign currency out of its coffers again. Government’s intention is to spread unutilised foreign currency to other players in need, but the intervention is retrogressive and wasteful as corporates will end up spending their earnings on less important commitments to avert the impact of this retrogressive law on their earnings.

An open market allows people to use their foreign earnings on what they want and when they want to because they own it. This simple ownership principle will build business confidence in Zimbabwe’s financial system and grow national wealth. To support this argument, below is a quote from respected currency expert Professor Steve Hanke in his latest Forbes published article on Zimbabwe: Zimbabwe Introduces a New Currency and Maxi-Devaluation.

“From this, it follows that the imposition of exchange controls leads to an instantaneous reduction in the wealth of the country, because all assets decline in value. To see why, it is important to understand how assets are priced.” Professor Hanke further argued that whenever there are exchange controls and restrictions on free convertibility, black markets always appear.

Liquidity Management Promises

Zimbabwe’s Apex bank will intervene in the market to sanitize liquidity in a bid to contain inflationary and exchange rate pressures through a cocktail of money supply instruments.

Revisiting 2008, Zimbabwe’s record breaking hyper-inflationary year, and year 2018 when the country held its harmonised elections, excessive government borrowing and disregard for prudential monetary frameworks and borrowing thresholds collapsed the country’s financial system. Add to the above the yet-to-be explained inability to trigger Afreximbank’s US$ convertibility guarantee on bond notes and RTGS values in circulation as repeatedly alleged by Zimbabwe’s monetary authorities in 2018.

These morale hazards remain a major threat to Zimbabwe’s reform agenda as businesses and citizens remain doubtful of the sincerity of their government’s policy pronouncements.  It would be a walk to fame if Zimbabwe’s monetary authorities implement upright liquidity management interventions without prejudice to its people.

Sequential Currency Crisis

Zimbabwe’s currency woes are a culmination of a false placement of economic solutions on external players that the nation has no control of. In articulating his Zimbabwe is open for business mantra, the mineral rich southern African country’s president was earmarking a downpour of foreign direct investments from global investors. This anticipated foreign currency did not come at a time the Zimbabwe government had neglected its own local businesses for foreign income. RBZ figures show that in 2018, only 2.27 percent of Zimbabwe’s $10.32 billion banking sector deposits came from foreign lines, with another paltry 1.91 percent coming from foreign entities.

This sequential crisis still hovers over Zimbabwe after the new policy pronouncements. As banks begin trading in foreign currency, it is the demand and supply forces that will determine the exchange rate. In Zimbabwe’s case, what if foreign currency inflows remain flat? With a drought forecast, the anchor agricultural sector may fail to uplift foreign currency inflows to Zimbabwe in 2019. Lastly, under a restrictive RBZ exchange rate and foreign currency allocation system, local banks will only close the black market premium on foreign currency trading, but will not stop the wheels of a liberal black market from controlling the country’s foreign currency trading. Zimbabwe’s 2019 monetary policy is better than its preceding policy statement. However, asking if the country’s currency interventions will work is similar to saying; ‘Will the paper tiger roar?