Phillimon Mhlanga / Taurai Mangudhla
Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, yesterday announced a raft of interventions that seek to prevent an economic implosion characterised by record inflation post dollarisation and market distortions stemming from a currency crisis.
Zimbabwe is currently facing a litany of economic challenges that have led to company closures, uncompetitive local industry and declining exports.
The central bank chief yesterday presented a Monetary Policy Statement which put the burden of determining whether or not the country’s quasi currency, the bond note, introduced 28 months ago, was at par with the United States dollar to market forces. But by doing so, he effectively did away with the government’s long insistence that the bond note had a 1:1 parity with the US dollar.
He also gave the bond note, coins, and existing RTGS bank balances a new fancy name: From hence, they will be called the RTGS dollar.
At the heart of Mangudya’s statement was the introduction of the interbank foreign exchange market, a mechanism for trading US dollars with Real Time Gross Settlement (RTGS) dollars. The formal trading will be done through banks and bureaux de change, meaning the RTGS dollars becomes part of the multi-currency system in Zimbabwe.
Mangudya said the measures put in place would ensure that companies remain in business and become competitive.
Though before yesterday, Mangudya had been insisting that the RTGS or bond notes were at par with the US dollar, he said the new system would restore domestic competitiveness and promote growth. This, he added, would preserve the purchasing power of the RTGS dollar and restore export competitiveness within the economy.
But Christopher Mugaga, an economist and chief executive officer of the Zimbabwe National Chamber of Commerce, said the central bank had been a “bit coward” and they should have gone directly for a local currency as the multi-currency system continued to create uncertainty.
“As private sector, we have been clamouring for a local currency. They will say it’s a master stroke but they have been a bit coward,” Mugaga told Business Times, adding: “There is no interest rate policy. Inflation is way above interest rate. So what we have here is an expansionary monetary policy. My fear now is that it will still give room to arbitrage opportunities and speculative issues.
But Ashok Chakravarti, another economist, said “the governor has made a courageous step which I will describe as bold measures. There are many risks with the system but safeguards will be put in place. We will have a falling inflation rather than an increasing inflation. This is the system put in place in Nigeria, also now in Angola. This is the market for essential users.”
Dairibord CEO, Antony Mandiwanza, said the system would be useful if complemented by fiscal measures, which is not the case at the moment.
“The movement from control to the auction system is positive, but what is our target rate?” Mandiwanza asked. “I think [the auction system] will be useful if complemented by fiscal measures.”
Mangudya said the introduction of the inter-bank foreign currency would be on a “managed floating” system. “We are using what we call managed floating on a willing buyer willing seller, not the auction system,” Mangudya explained, saying it will deal with the runaway inflation, which at the end of this month would be at 50.6% on a year to year basis, a decade long record.
Mangudya said the central bank would monitor the inter-bank trade on a daily basis.
“Currently the parallel rate of exchange is between 3.4:1 and 4:0:1,” the Governor said. “We want to manage the runaway inflation. We are asking, should the parallel rate guide the economy or we should formulate a formal system that should guide the economy? We don’t have a target [for the exchange rate] but it will be on a willing buyer, willing seller basis through banks and bureaux de change.
“This means the interbank system will provide forex to bona fide people, not those who want to fund Nostro accounts. Banks shall report activities of the interbank foreign currency market to the [RBZ] that shall closely monitor the foreign currency trades on a daily basis using the form and format stipulated by the [RBZ],” Mangudya added.
The 2009 Reserve Bank of Zimbabwe Act states that all balances are in US dollars. But, the central bank is amending the Act to provide for RTGS dollars.
Apart from the liberalisation of the exchange rate, the central bank introduced other measures such as the local settlement of Nostro FCA transfers, liquidity management, IFRS 9 implementation, macro-prudential policy framework, anti-money laundering measures and cyber risk management.
The central bank chief said as part of ongoing initiatives to strengthen the stability and resilience of the financial system, the RBZ was putting in place a macro-prudential policy framework effective from 30 June 2019 in line with the International Financial Reporting Standard (IFRS) 9.
Going forward, Mangudya said, the RBZ’s Financial Intelligence Unit would place greater focus on ensuring compliance by banks and Designated Non-Financial Businesses and Professions (DNFBPs), including through the invocation of administrative penalties prescribed under the Money Laundering and Proceeds of Crime Act.
“The Bank calls upon all stakeholders with various roles in the fight against money laundering, including agencies involved in the identification, investigation and prosecution of money laundering cases, to work diligently to improve the effectiveness of the country’s AML/CFT regime,” he said.
The central bank is also fighting cyber risk and ensuring migration to Euro Mastercard Visa (EMV).
“Further to the cyber security guidance, market participants are required to migrate to Euro MasterCard and Visa (EMV) standards to ensure enhanced card security features to curb cyber related activities. Currently, over 80% of the card infrastructure in the country is now EMV compliant. Financial institutions should therefore ensure that all cards issued in the market are EMV compliant by 31 March 2019.”
