THE 2019 Monetary Policy Statement (MPS) announced by the Reserve Bank of Zimbabwe (RBZ) last week has generated a lot of positive debate, especially considering that the monetary authority dumped the 1:1 exchange rate parity between the US dollar and bond notes.
While this is encouraging for a start, more needs to be done on the production front, which should buttress the success of the prescribed reforms.
Interbank foreign exchange market
The establishment of the interbank foreign exchange market is an important policy shift by Government.
That, if properly administered, has the potential to address the challenges of foreign currency shortages that businesses have been facing. Businesses are fully aware that what will make this foreign exchange market work effectively is increased productivity. Business would want this exchange market to be anchored on the efficient market characteristics especially the information efficiency aspect.
We believe this is the only way to reduce participation of businesses in the “black market,” which often causes production costs to skyrocket. For us, it is a big relief that the Government has finally accepted that the exchange rate of 1:1 between the US dollar and the bond note long served its purpose and was now causing more problems for businesses.
This policy change is important for business and, therefore, the Monetary Policy Statement is a step in the right direction. While the business community is cautiously optimistic about the MPS, there are some areas of concern within the policy statement that the RBZ needs to clarify and improve on.
Credit lines to stabilise the interbank exchange market
The RBZ Governor, Dr John Mangudya, stated that Government has arranged sufficient credit lines to enable it to maintain adequate foreign currency to underpin the foreign exchange market.
As businesses we would want the Governor to give more information on these credit lines. For example, what is the quality of such credit lines? Who is providing such credit lines? What does the Governor mean by “sufficient” credit lines? Clarifying these issues will feed into the confidence required from all the market participants.
It is also important to note that credit lines are in fact a form of debt and have the potential to negatively swing the rate, even if such credit lines are channelled into the productive areas.
Efficiency of the interbank foreign exchange market
We understand that stabilisation of the exchange rate between US dollar and the RTGS dollar is a function of high productivity in particular of the exporting sectors.
The supply side of the foreign currency is absolutely critical for the monetary policy to succeed.
Businesses require foreign currency to meet their foreign obligations and to re-tool. Foreign currency shortages have been the major challenge for businesses.
Foreign currency requirements are not only for the purchase of raw materials but also for retooling to replace the archaic machinery that increases unit costs thereby rendering Zimbabwe products price uncompetitive at the global stage.
The need for the interbank foreign currency market to be efficient cannot be over emphasised. As business we, therefore, appeal to Government to intervene in this market only when it is absolutely necessary.
Encouraging, promoting and protecting the sustainable growth and development of business in Zimbabwe and further enabling free and fair practice of business by all is what we desire.
Export retention thresholds policy
Business would like to appeal to Government to increase export retention thresholds for both large and small scale gold producers and for other minerals produced to levels higher than those obtaining at the moment.
This will reduce demand for foreign currency on the interbank foreign exchange market. Such a measure can potentially stabilise the rate between the US dollar and RTGS dollars at reasonable levels. As business we believe this is a better way of Government’s intervention before even considering credit lines that come at a cost. Currently, gold sector retention threshold is at 55 percent and 50 percent for other minerals.
As the Association for Business in Zimbabwe (Abuz) we would like to encourage Government to keep moving in the right direction and indeed to increase speed in enacting economic policies that create conducive environment to do business.
The implementation framework for the MPS should ensure orderly, efficient and effective participation by all stakeholders.
RBZ must constantly supervise banks and bureaux de changes to ensure the foreign currency auction process is corrupt-free and responsive to the needs of the business community.
This will create confidence and also serve to attract the much-needed foreign direct investment. The country’s institutions of importance must lead from the front and avoid enacting economic policies that come in as way of rubber stamping what the “black market” would have already decided.
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