eBusiness Weekly
Recently the RBZ reiterated a policy measure, first announced earlier in February this year that the financial sector was now required to ring fence NOSTRO receipts and free funds as well as foreign currency cash deposits into special Foreign Currency Accounts designated as Nostro FCAs.
This measure, meant to distinguish locally exchanged US dollars in the banking system from externally generated Foreign Exchange was long overdue, and is by far one of the most positive moves to be implemented by the central bank in response to the challenges faced by the multi-currency system since the advent of cash and foreign currency shortages which precipitated the introduction of the Bond notes as both an export incentive as well as a transactional mode of payment.
There has been mixed reactions to the dramatic U-turn by the central bank, which only a year or so ago when Bond notes were introduced, insisted that the local dollars should cohabit with foreign currency in the same accounts.
The result has been a sudden panic by holders of RTGS dollars, driven by fears that the RTGS is now defacto Zimbabwe dollar.
However, Government and the central bank, recognising that RTGS dollars should maintain and preserve value as equivalent to US dollars on a one-to-one basis, which is the legal position, have maintained this statutory convertibility ratio.
While economists of various persuasions can disagree to an extent with the legalistic position of the central bank authorities, the policy is in fact quite sound, as allowing the RTGS to evaporate would be reckless and in fact prove disastrous to the economy.
That holders of RTGS can choose to discount their RTGS and other electronic balances for foreign currency cash or nostro dollars in the parallel markets is neither a decision supported by the central bank. It becomes solely a matter of individual choice and utility.
Again the Reserve Bank is correct to take that position, and the Minister of Finance has come out to say that this stance will subsist until a new currency reform framework is implemented.
Until then, economic players are advised to hold their horses.
My take is that the RTGS stock can in fact very soon be fully valued in US dollar terms as long as few policy measures are put in place by the Government and RBZ.
Let’s recall why we are where we are today.
When the economy dollarised in 2009, a fundamentally mistaken assumption was made that because we had adopted the US dollar as both the accounting currency as well as the main currency of transaction, dollars would be awash forever in Zimbabwe.
However, as reality would have it, because we are net spenders of foreign currency as a country, we almost forgot that as exporters exported as hard as they could, and importers were using the same dollars to import goods and services we quickly moved from net foreign currency inflows to a situation where we had net foreign currency outflows. So inevitably, the country would sooner rather than later end up with dry Nostro accounts, unable to match the local representation of money in the banking system.
This situation was compounded by the fact that Government through the central bank began to finance its budget shortfalls by creating new money, via the RBZ overdraft window and issuance of quasi fiscal instruments. These actions have accelerated the process and here is where we are, but it is not the end of the road. The question is where did all the foreign currency go?
Well some was spent on critical imports such as fuel, electricity, food and raw materials, some was “externalised” but some is still sitting in the country.
So what can be done?
Firstly we need to plug the leakages. Government should implement a policy where non-essential imports, or low priority imports should fund import duties in foreign currency.
Given that non-essential imports constitute as much a 50 percent of the total import bill, this could translate to a large reduction in import demand as well as a significant increase in foreign currency revenues for the economy.
The result, lower import bill, and less pressure on foreign currency markets. Immediately that would reduce the open market premium being demanded by parallel market dealers.
Secondly, I would also strongly suggest that imports should only be cleared upon provision of verifiable legal source of funds to pay for the consignment. As of now, a large component of the import bill for the country is coming in without this requirement.
Obviously care should be taken not to then create shortages of essential goods in the economy but these basic tools, in use in other countries are an imperative if we are to restore the integrity of the multi-currency system and therefore preserve value of the locally held US dollars.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the writer is associated with.
