Mangudya’s plan to clear auction backlog: Tap into Govt forex tax revenue, dip into lines of credit

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

The Reserve Bank of Zimbabwe (RBZ) says government will use some of its foreign currency tax receipts to clear delayed forex allocations from the auction system.

In its monetary policy statement issued on Thursday, the central bank doubled down on its foreign currency auction system, which has come under criticism in recent weeks over its inefficiency and an exchange rate widely considered to be unrealistic. The auction’s inability to meet growing demand timeously has resulted in a payments backlog and a widening gap between the official and black market exchange rates.

“Bank has put in place the following measures to deal with the residual foreign exchange auction allotment backlog: working closely with Government to ensure that some of the foreign exchange balances in the Exchequer Account are utilised to expunge the backlog,” the RBZ said.

The government is estimated to have collected US$700 million in taxes during the first half of 2021.

“Backlog gone within 45 days”

Finance permanent secretary George Guvamatanga on Wednesday announced that Treasury and the central bank had agreed on a plan to clear the forex auction backlog, estimated to be around US$200 million and going back seven weeks, within “the next 30 to 45 days.”

The RBZ would also use letters of credit for imports of key commodities and capital goods, to relieve pressure on the auction system. Banks would also be encouraged to lend some of the US$1.7 billion foreign currency deposits, which the central bank described as a “long foreign currency position.”

Central bank says it will also use an Afreximbank facility to manage forex demand.

“The Bank has also put in place a US$150 million Letter of Credit (LC) facility with Afreximbank, which will see participating banks issue letters of credit to their qualifying clients to import essential raw materials and other inputs to support the current growth trajectory. The LCs will go a long way in easing pressure on the Foreign Exchange Auction System as some of the critical imports will be financed under this arrangement,” RBZ said.

Although it did not specifically mention the anticipated US$1 billion SDR allocation from the International Monetary Fund, the central bank announced plans to build reserves and help defend the currency.

“The Bank will start to set aside foreign exchange resources to build the country’s foreign exchange reserves to anchor exchange rate stability and to cope with transitory exchange rate shocks in the national economy,” it said.

Analysts and industrialists have called on the authorities to urgently address the apprehension that the official exchange rate was fixed, as well as the forex auction system’s inability to allocate funds to winning bids. Some have called for the forex auction system to be scrapped altogether, with an interbank market replacing it.

However, the RBZ insists it will continue with the auctions, promising to “strengthen the system to ensure that it reflects economic and market fundamentals of supply and demand.”

Forex receipts surge

RBZ data showed that foreign currency earnings rose 29% during the first half of the year, reaching US$4.02 billion against US$3.117 billion over the same period last year. This increase was driven by a 21% jump in export proceeds, which reached US$2.3 billion (HY2020:US$1.9bn), followed by diaspora remittances at US$649 million (HY2020:US$375m) and foreign loans at US$505 million (HY2020:US$455m).

The central bank’s diaspora remittance figures differ significantly from data provided by Finance Minister Mthuli Ncube last Thursday. He estimated remittances at US$747 million (HY$288m). There was no immediate explanation for the discrepancy.

At US$1.9 billion after a 38% increase on the half-year 2020 exports, minerals – led by platinum – accounted for 83% of total exports in the first half.

Foreign investment remains low, at US$22.35 million in the first six months of 2021, compared to US$17.8 million in the first half of 2020.

Source: RBZ

Tempered inflation outlook

The central bank has raised its year-end annual inflation rate from below 10% to the 22%-35% range, citing “unavoidable shocks to international food and administered prices” amid international crude oil prices which went up by about 50% since December.

Analysts have warned that the growing premium on the official exchange rate, which is often reflected in most retail prices, continues to exert inflationary pressure.

The RBZ said it would continue to pursue a tight liquidity management regime as it seeks to keep inflation in check.

RBZ buys part of Zimswitch

The central bank announced it was acquiring a 15% shareholding in Zimswitch, the country’s sole electronic funds switch and clearing house run by banks.

“The Bank is proceeding to acquire 15% shareholding in Zimswitch Technologies (Private) Limited in order to spearhead interoperability of infrastructure and connection protocols of mobile money transmission providers and mobile banking providers through the national payment switch and enhance monitoring and surveillance of the financial system in Zimbabwe,” the RBZ said.

In July 2020, the central bank designated Zimswitch as the only national payment switch with immediate effect, and ordered all mobile money transmission providers and mobile banking providers to connect to the Zimswitch platform.