eBusiness Weekly
Golden Sibanda
The directive by the Reserve of Zimbabwe (RBZ) early last month for banks to separate foreign currency accounts (nostros) and Zimbabwe’s surrogate currency (bond notes/RTGS) balances, was part of initial steps towards the introduction of market based foreign exchange distribution — the interbank market — Business Weekly can reveal.
RBZ governor Dr John Mangudya on the 5th of last month directed all banks to separate foreign currency accounts or nostros and real time gross settlement (RTGS) balance holding accounts in order to prevent intermingling of the funds, a scenario he said discouraged inflows of foreign currency.
When the central bank chief made the directive, he also announced a cocktail of lines of credit, including from Afreximbank, meant to entrench the multi-currency system and also ensure economic stability.
Economic stability is expected to lay the foundation for a foreign currency interbank market as the country, then, will have access for foreign lines of credit. The foreign currency interbank market is a subset of the foreign currency market overall which in turn comprises the largest trading market globally.
The foreign currency interbank market is a driver for all pricing and activity across the entire market, primarily because of its volume, net worth and institutional expertise.
Business Weekly has it on good authority that the central bank is now looking ahead and flirting with the idea of the foreign exchange interbank market, which would allow efficient market determined and merit based distribution of foreign currency that comes into the economy. The central bank presently uses a priority list framework to allocate foreign currency towards essential commodities such as fuel, electricity, wheat, industrial equipment and machinery, chemicals and drugs.
High placed sources in Government said the central bank’s plans were part of a gradual process of dealing with the country’s problems. Other interventions include addressing the yawning fiscal imbalances.
This comes as the current system of allocating foreign currency is deemed unsustainable, but there also is recognition that to avoid shock therapy interventions, Government would continue to allocate foreign currency on the basis of priorities to keep essential products in supply.
This has also seen the Government, through the Reserve Bank, maintaining a fixed exchange rate of 1 to 1 between the US dollar and the bond note informed by fears that a liberal exchange rate system could see a swing in foreign currency rates, which would drive price inflation.
Critics of the fixed exchange rate system say it is not sustainable, as it means Government is subsidising private consumption in the country and beyond at a time Zimbabwe is not generating adequate foreign exchange.
But sources within Government circles insist the drift towards liberal economic policies, including regarding the monetary system, needs to be taken gradually to avoid negative effect of shock therapy on consumers.
“What needs to be done is that the interventions are supposed to be a package. One cannot use a single policy variable to resolve the economic problems for the whole country through reducing fiscal imbalances so that you right size public expenditure,” the source said.
“At the same time, we need to deal with access to foreign finance so that we have backing of the currency. We need to have currency reforms, but this should be gradual.
‘‘The idea for example; if we play our cards very well, as we re-engage and bring more foreign currency, that wills the time to strike the balance.
“Even in terms of subsidies (financing private consumption through foreign currency allocation), we need to do it gradually as opposed to the big bang approach. For example, we have said the FCAs be separated from RTGS, the next thing which is required we start trading the funds in the FCAs.
“Once you start the interbank trading, you then develop the interbank market, but you cannot have the interbank market before you get the fundamentals right, but what we have done is the first step towards the development of an interbank market,” the well placed Government source said.
