Monetary policy for dummies: What does this all mean for you?

RBZ governor John Mangudya (Pic: REUTERS/PHILIMON BULAWAYO)

Reserve Bank of Zimbabwe governor John Mangudya on Wednesday effectively redenominated your RTGS balances, as well as bond notes and coins into a currency known as RTGS dollars. He also ended the contentious 1:1 peg against the United States dollar.

The value of your RTGS balances and bond notes and coins will now be determined at an inter-bank foreign exchange market.

What does this mean for my deposits?

You have probably already known this for a while now; the money in your bank account – unless of course you are lucky enough to have one of the FCA Nostro accounts introduced in October 2018 – is not really in United States dollars. What you have are RTGS dollars. Starting on Monday, February 25, the value of that money in your account, relative to the US dollar, will be determined by the market. Banks and bureaux will buy and sell foreign currency between themselves. It is from all this trading that a rate will be determined. The daily rate will be displayed publicly.

Using current black market rates, your RTGS deposits have already been diluted by a factor of about 4. The market will now decide just how much your money is worth.

Do we have a new currency?

The officials are still averse to calling the RTGS dollars a currency. But the government will soon issue a legal instrument including RTGS dollars within the multi-currency basket. It is, in simple terms, a currency.

Wait, is this even legal?

Announcing the latest policy measures, Mangudya said the central bank had taken into account the accounting, financial, economic, social and legal implications of floating the currency. The planned legal instrument, most likely to be issued in terms of the contested Presidential Powers (Temporary Measures) Act, will seek to give legal effect to the new currency policy. The Reserve Bank of Zimbabwe Amendment Act of 2017 set the exchange rate of bond notes and the US dollar at 1:1. A legal instrument is required to reflect the new policy thrust.

OK, so what is the starting exchange rate of this new ‘currency’?

During his presentation, Mangudya frequently made reference to a parallel market exchange rate between 3-4 RTGS dollars/bond notes to the US dollar. He, however, says the central bank will leave the market, through inter-bank trade, to determine the exchange rate.

He, however, reckons that the RTGS$ will trade stronger on the now established formal market than it did on the black market.

Some analysts believe that the significant mismatch between RTGS balances – there is about RTGS$10 billion compared to forex deposits of about US$450 million – means the local unit will immediately come under pressure once the formal trading starts.

Mangudya counters this argument, saying not all of the RTGS$10 billion money stock is available to chase after the limited forex available.

He gave an interesting breakdown of just how much money is out there. The bulk of the money is tied up in loans and advances (RTGS$4 billion), Treasury Bills (RTGS$2.5 billion), and Savings Bonds (RTGS$1.5 billion). According to Mangudya, available RTGS balances, or the money that can be used to buy forex on the black market, amounts to RTGS$1.8 billion. This is against the available US$450 million deposits and various credit facilities of about US$600 million.

In short, he is saying there just isn’t a lot of RTGS$ for people to buy forex with. He believes that this will keep the rate steady.

Will I be able to walk into a bank and get forex?

The inter-bank market will be used for all bona fide foreign payment invoices, except for education fees, Mangudya said. He did not elaborate on why education is an exception. The expatriation of forex to fund offshore accounts is also not allowed.

Bureaux de change will also be authorised to purchase forex at the market-determined rate, but will be limited to selling foreign currency for small transactions such as subscriptions, business and personal travel up to a daily limit of US$10,000 per bureau de change.

What happens to prices?

That’s the question on everyone’s mind.

The RBZ says all pricing for domestic transactions will now be in the local RTGS$ currency, to end the multiple pricing system and the charging of domestic goods and services in foreign currency.

The central bank is turning the economy away from re-dollarisation, which it says would send the economy back into recession.

Should the market prove Mangudya wrong and the exchange rate weakens further than the current parallel market rate, prices will go up.

What about essential imports?

Foreign currency requirements for Government expenditure and other essentials, such as medicines, fuel, electricity, cooking oil and water treatment chemicals will continue to be made available through existing letters of credit and the Foreign Currency Allocation system at the RBZ. Those buying essential goods won’t have to compete for forex on the interbank market.

How will the RBZ fund these?

The central bank still maintains various foreign currency surrender arrangements for exporters. The RBZ keeps a portion of the US dollars that exporters get when they sell goods outside the country.

Producers of the number one export – gold – will continue to surrender 45% of their forex earnings to the central bank. This now also applies to small scale gold producers, who previously enjoyed a lower surrender threshold of 30%.

Tobacco merchants get to keep 80% of their export proceeds, while tobacco and cotton farmers now get 30% of their sales in US dollars.

Producers of other minerals, including platinum and chrome, retain 50% of their forex earnings.

Tourism operators, horticulture producers, manufacturers and the transport sector will keep 80% of their earnings in forex.