RBZ’s new FCA ‘ring-fence’, explained

ON Monday, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya finally put a stop to official pretence that the burgeoning electronic balances in the banks – and the loathed bond notes – were at par with the United States dollar.

Mangudya announced the return of foreign currency accounts (FCAs), which will be separated from real time gross settlement system (RTGS) deposits. For a long time, critics have long argued that the RTGS balances, which ballooned on account of the government’s unrestrained issuance of Treasury Bills, were a de facto local currency whose value was a significant discount on the US dollar.

The authorities, who of course knew this all along, do seem to have come around.
On Monday, Mangudya said the separation of FCAs and RTGS accounts is meant “to eliminate the commingling or dilution effect of RTGS balances on Nostro foreign currency accounts.”

At the end of June, electronic bank balances stood at $9.53 billion, against hard currency reserves of US$200 million. The central bank hopes its intervention will restore forex deposits in the economy.

According to Mangudya, foreign exchange earners that include international organisations, diaspora remittance recipients, holders of free funds, exporters and recipients of foreign loans qualify to hold FCAs.
The policy move sees the reversal of the arrangement which followed dollarisation in January 2009, when the country dollarised and transformed all bank accounts into effective FCAs.
The reversion to FCAs – transactional accounts holding foreign currencies – effectively confirms the existence of a local currency, despite official protestations to the contrary.

The RBZ has given banks up to October 15, 2018, to separate the real FCAs (which the RBZ calls Nostro FCAs) from the chaff (RTGS FCAs).
Banks will have to open new FCA bank accounts for qualifying depositors, but are required to use their know-your-client principles to separate the accounts without requiring their clients to complete any other documentation.

Mangudya said the RBZ is in the final stages of negotiations with the African Export Import Bank (Afreximbank) for a US$500 million guarantee facility to support the restoration of the FCAs and ensure depositors are able to access their funds upon demand.
This new facility is expected to be in place by the end of October 2018.

Buried deep inside the February 2018 monetary policy statement is a poorly communicated commitment by the central bank “to provide assurances that international remittances and individual foreign currency inflows received through normal banking channels are available for use when required by the owners.”

On Monday, Mangudya acknowledged that this policy tilt had “not been implemented by some banks on a transparent basis that promotes confidence within the economy.”
Several banks have, for months before Monday’s announcement, offered individual foreign currency earners limited access to hard currencies.

The mere existence of at least two currencies raises the question of the pricing of one in respect of the other — the exchange rate. sexpromo.ch

While acknowledging “the dilution effect of RTGS balances on Nostro foreign currency accounts”, Mangudya still insisted that the two currency categories held in the different accounts would have the same value.

“This is essential in order to preserve value for money for the banking public and investors during the transition to a more market based foreign currency allocation system that shall be implemented once the economic fundamentals are appropriate to do so,” Mangudya said.

The reality is, of course, considerably different.

Ahead of Mangudya’s policy statement, the RTGS ‘currency’ was trading at a 120% discount to the US dollar. There was no let up after the policy statement, with early indications showing a further weakening of the local currency.

Mangudya and his boss, Finance Minister Mthuli Ncube, did not seem particularly concerned about the exchange rate on the parallel market. Ncube, instead, expanded a tax on electronic transactions to ensure government taps into the foreign currency trade as well as the largely untaxed informal sector.

The tax, introduced in January 2003 at 5 cents per transaction, is now set at 2 cents per dollar and is to be levied on all electronic transactions as Ncube seeks to expand the tax base and capture transactions in the informal sector. Government believes the tax tweak will be kinder to low income earners.