Few things fill a Zimbabwean with fear and dread more than the word “Zimdollar”. So, it was no surprise when news that Zimbabwe had declared the RTGS the sole local currency, one more step in the country’s march towards its own unit, was met with shock and horror.
In a Statutory Instrument issued Monday, Finance Minister Mthuli Ncube said: “The British pound, United States dollar, South African rand Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe.”
Here, we try and make sense of what Mthuli has done, and what really it is that he is hoping to achieve with this latest move.
What just happened?
From Monday, only the “Zimbabwe dollar” – in the form of bond notes or coins or RTGS – is legal tender in Zimbabwe. You can no longer use US dollars, Rand, Pula or other foreign currencies to buy and sell locally.
Effectively, this is the end of the multi-currency regime, introduced in 2009 after Zimbabwe ditched the Zimbabwe Dollar. In February, central bank introduced the RTGS as a new currency, part of measures to tame forex shortages.
This new order is the latest in a series of measures that Ncube has taken since October, when he first launched the Transitional Stabilisation Programme. Launching that programme, Mthuli and his permanent secretary, George Guvamatanga, pledged to take steps towards ending all controls on the exchange rate.
Since then, government separated RTGS and USD balances, before introducing a new interbank market in February, effectively ending the 1:1 parity and allowing a partial float of the RTGS.
Why is government doing this?
According to bankers, the Government’s plan here is to force holders of US dollars to sell their forex onto the local market. This way, they seem to believe, demand for US dollars will ease.
Because more and more local goods and services are being priced in US dollars, demand for US dollars has also been going up. This has meant that the value of the RTGS has fallen sharply as people chased more US dollars.
One banker tells Reuters: “They (government) are hoping that this will force generators of forex to sell their forex to make domestic transactions and thus create liquidity in the interbank market.”
But, the banker adds, it depends on other factors: “It might work if they can support the market with a large injection of liquidity to complement this. If they can’t, well then people will just hold onto their forex even more tightly than before.”
In May, Guvamatanga said he believed exporters were holding on to close to US$1 billion, keeping it away from the formal interbank market.
Last week, the International Monetary Fund’s resident representative, Patrick Imam, said the central bank should allow RTGS to float freely, allow exporters to sell dollars at the interbank rate rather than surrender them to the central bank, and raise interest rates to curb inflation and avoid “spontaneous re-dollarisation.”
RTGS is trading at around 6.3 to the US dollars on the official interbank market, but it is trading at half that value on the black market.
What does it mean for FCAs?
Many fear that the new regulation will lead to the expropriation of their FCAs. The FCAs, introduced under changes in October, remain unchanged, at least according to the notice.
“Nothing in section 2 (of the regulations) shall affect the opening or operation of foreign currency designated accounts, otherwise known as ‘Nostro FCA accounts’, which shall continue to be designated in the foreign currencies with which they are opened and in which they are operated, nor shall section 2 affect the making of foreign payments from such accounts,” reads the SI.
Just how many FCAs are there?
The latest available data from the RBZ shows there were 133,633 FCAs, holding US$674 million at the end of December 31, 2018.
Of the total FCA deposit value, 97% was held by corporates. Just over 111,000 depositors, mostly individuals, held less than US$1,000.
Is duty still payable in foreign currency?
Import duty on selected goods – under Statutory Instrument 252A of November 2018 – will still be in US dollars.
The notice says: “Nothing in section 2 (of the regulations) shall affect the requirement to pay in any of the foreign currencies…duties of customs in terms of the Customs and Excise Act that are payable on importation of goods specified under that Act to be luxury goods, or, in respect of such goods, to pay any import or value added tax in any of the foreign currencies.”
Remittances, such as money transfers via Western Union, are not covered by the SI. As at late Monday, some agencies were freely paying out remittances in USD.
Local currency: How do other countries do it?
In neighbouring countries, the standard is to use your forex to buy local money for transactions.
Zambia has been in Zimbabwe’s position before. In 2013, the government introduced two statutory instruments to protect a falling Kwacha. Because local businesses were using USD, they introduced the two instruments to try and deal with the problem.
Statutory Instrument number 33 prohibited quoting and paying in foreign currency as legal tender, while Statutory Instrument number 55 empowered the Bank of Zambia to monitor inflows and outflows of international transactions. However, this was revoked two years later.
However, just this May, the country’s economists said it may be time to do this again, as the Kwacha weakens again.
In a statement on May 7, the Zambia Economics Association said: “The Association also echoes the need for the authorities to revisit the Statutory Instrument No 55 attempted a few years back which was hastily implemented.
“Allowing for price quotes in foreign currency in the name of the free market economy has cost the Kwacha its sovereign value. Most neighbouring jurisdictions will not allow for entrants to use any currency but the local currency. This has helped preserve the value of the local units. The Association acknowledges that light forms of exchange controls have been misunderstood by many as stifling flows into a liberalised framework. However, the EAZ cites most jurisdictions that have some form of restrictions to preserve value and confidence in local currencies.”
If a South African gets payment from a foreigner for services, gratuities, gifts or tips, they must sell that forex to a bank within 30 days.
What will government do to support the local currency?
Within hours of Ncube promising a package of measures from the central bank to support the local currency, RBZ governor John Mangudya announced the following:
- Government’s intention to take over local banks’ historical foreign liabilities amounting to US$1.2 billion. The move will suck ZWL$1.2 billion (based on the discontinued 1:1 rate) from the market by the end of this week.
- The overnight lending rate is now 50% per annum, up from 15% previously. This is a measure meant to mop up liquidity from the market. A day earlier, Ncube had indicated that he would lift the two-year-old 12% cap on interest rates. At his February monetary policy statement, Mangudya left interest rates unchanged, saying a new bank rate, guided by inflation, was to be introduced. Government believes people are borrowing at low rates to buy forex. In April, the Bankers Association of Zimbabwe (BAZ) recommended a rate hike in order to “allow for proper risk-based pricing of loans”, a call also made by the IMF.
- The RBZ will also relax its hold on exporters’ earnings, with at least 50% of the surrender portion now being liquidated on the interbank market. This is one of the several IMF recommendations that the central bank has put in effect. The IMF recently approved a Staff Monitored Programme for Zimbabwe.
- Caps on interbank forex trading margins have been removed. Administrative restrictions on bureaux de change have also been lifted.
- The central bank has also moved to close the loophole in securities trading for dual-listed stocks; share transfers will now be effected after 90 days.
- Letters of Credit worth US$330 million have been established for the importation of fuel, cooking oil and wheat.
The biggest impact will be seen in the reaction of the market, especially from retailers and industries who have increasingly switched to US dollars as inflation rose. While the government may be calculating that holders of forex will offload it to get the Zimbabwe dollars they now need to transact locally, the market may instead simply continue trading in USD informally, as before.
Unless there is a major cash injection – and Mthuli is negotiating new lines of credit with China – companies will find it hard to source forex on the already parched interbank market to restock.
A recent US$500 million facility from Afreximbank was never adequate as it is enough for just a month’s worth of imports.
Banks may face liquidity shortages in the near term after the sharp hike in the overnight rate.
Broadly, the new currency measures are designed to suck the life out of the black market. However, the main hurdle, as with all other steps that Mthuli has taken on the currency so far, is the collapse in confidence, a key ingredient for any government trying to turn around an economy. The shrill opposition to the latest move reveals the depths of public scepticism.