Foreign Currency Accounts are back, but your bank balance isn’t USD anymore

RBZ chief John Mangudya (REUTERS/Philimon Bulawayo)

Reserve Bank of Zimbabwe has told banks to separate foreign currency accounts (FCAs) from local RTGS balances, a step which reflects the decimation of the value of depositors’ funds.

From October 15, banks will allow depositors to hold separate accounts for US Dollars.
This is the first time that banks will hold FCAs since January 2009 when the country moved to a multi-currency system anchored on the US dollar. In effect, this move is a tacit admission by central bank that what bank depositors now have in their bank accounts is no longer US dollars, but a virtual local currency.

“For the avoidance of doubt, these FCA account deposits include free funds, remittances and export earnings,” RBZ governor John Mangudya told reporters Monday afternoon in his mid-term monetary policy statement.

According to central bank data, bank deposits stood at $9.53 billion as at June this year. In contrast, an RBZ official last week said the country only had reserves of US$200 million.

Mangudya says Zimbabwe is finalising negotiations with Afrexim Bank for a US$500 million fund to back the FCA accounts.

Finance Minister Mthuli Ncube, in a rare move for Government and RBZ, immediately presented his own fiscal review report, in which he gave an ambitious growth forecast of  6.3 percent. But his optimism was tempered by what both men admitted was the huge task of reining in runaway Government borrowing, which Ncube conceded was at the core of the crisis.

The numbers they gave tell the story; in 2016, Treasury Bills stood at $2.1 billion, but now there is $7.6 billion worth of TBs on the market. Government borrowings from RBZ stood at $2.3 billion at the end of August. This is three times the 2018 statutory limit of $762 million.

Debt is rising, with domestic borrowings now at $9.5 billion and external debt at $7.4 billion.

Ncube vowed to stem Government’s hunger for credit, by restricting the issuing of TBs. Where Government does issue TBs, he says, it will use the competitive auction system which is soon to be re-established. According to Ncube, rates on the RBZ’s savings bonds show that Government has been overpaying on the TBs.

Said Ncube: “These challenges are however not insurmountable. These challenges call for urgent reforms. It cannot be business as usual. Bold decisions need to be taken on the reforms front in order to stimulate growth and sustainable development.”

RBZ Governor Mangudya admits that inflationary pressures are building, but says he expects the inflation rate to be kept below the regional target of 7 percent by year-end. Mangudya said “painful measures” will need to be taken to stabilise the economy.

At the end of the week, Ncube is to present a “comprehensive policy package” that Government will pursue over the next two years.

Here are highlights from today:

  • FCAs reintroduced, supported by a US$500 million Afreximbank guarantee
  • Treasury Bill auction system restored starting in November
  • Foreign truckers transiting through Zimbabwe will now be required to buy their fuel in foreign currency
  • The Board of ZIMRA has been dissolved. The revenue authority will report to Treasury until a new board is appointed. According to Finance Permanent Secretary George Guvamatanga, this has been done for good governance. The Board’s term had expired, and Government rejected a request to extend it
  • The tax on money transfer transactions has been reviewed from 5 cents per transaction to 2 cents per dollar, which effectively increases transaction costs
  • Statutory reserves of 5 percent for RTGS will be introduced to mop up excess liquidity in the market

More analysis to follow…