Wanted: Roadmap on currency regime

Components of Reserve money as at the of end June 2023
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THE country’s banking sector is pleading for clarity on the journey the economy is going to take on the multicurrency system, which was entrenched into law for the period of National Development Strategy 1 (January 2021–December 2025).

Effectively, this implies that multicurrency ceases by December 31, 2025, unless there are extensions.

In June 2022, the Government gazetted Statutory Instrument 118A of 2022, entrenching the multi-currency system into law, making both the US and Zimbabwe dollars legal tender for all local transactions for the duration of the NDS1.

The regulations empowered registered lenders, banks, or any financial institution that lends foreign currency to receive repayment of the loan or credit in that foreign currency.

In addition, the legislation is also aimed at supporting the use of the willing-buyer, willing-seller exchange rate market price discovery in the setting of prices on the local market.

However, Bankers Association of Zimbabwe (BAZ) president Lawrence Nyazema told Business Weekly that banks are cautious about lending long-term due to the uncertainty in the multicurrency system.

“As things stand, the regulations that we have to safely lend US dollars are talking to NDS1, which ends on December 31, 2025.

“We need clarity on the journey that we are going to embark on as a nation. If we are going back to monocurrency, what are the timelines? If we are going to have an extension of multicurrency, again, what is the timeline?

“But our view as a banking sector is that we are not ready for a 100 percent mono currency. It will be ideal to have a clear period, and in our view, for the next five years, the Zimbabwe dollar should operate alongside multi currencies to increase its acceptance, and this largely bows down to incentives,” he said.

He noted that an incentive that was presented by the Government at the end of June 2023, where they said those that had taxes to be paid, at least 50 percent of that should be paid in local currency, created demand for the Zimbabwe dollar.

This is one of the ways we can increase acceptance and usage of Zimbabwe dollars without necessarily legislating to say, starting tomorrow, no more use of hard currency. So there are softer ways in which we can implement a mono-currency arrangement,” said Nyazema.

IH Securities, in its 2023 Banking Sector Report, said banks remain cautious in light of the volatile operating environment, with tenures going up to a maximum of 3 years for other loans and fixed income instruments and up to 5 years for retail mortgages compared to 30 years in developed countries.

The cost of borrowing is, however, very high.

IH Securities indicated that current pricing for USD debt in the market remains widely varied, ranging from 8,5 percent to 12 percent per annum (p.a.) for high-quality corporates, 15 percent or more on housing mortgages, and 9,5 percent to 12 percent for fixed-income instruments. Foreign currency deposits constituted 81,51 percent of total money supply as of June 2023, while local currency deposits accounted for 18,43 percent, and currency in circulation, 0,06 percent. Foreign currency-denominated loans, constituted 94 percent of the sector’s loan book.

To promote a culture of savings, the RBZ, effective July 1, 2022, reviewed the minimum deposit rate for Zimbabwe Dollar savings to 40 percent per annum and the minimum deposit rate for Zimbabwe dollar time deposits to 80 percent per annum.

“However, with the economy increasingly dollarising, we are likely going to see the FCA portion of deposits increasing while demand and time deposits will likely shrink,” IH said.

According to Nyazema, the short-term nature of deposits in the banking sector is that most people, both companies and individuals, utilise hard currency deposits that they get almost as fast as they get them; therefore, generally, the deposits in the banking sector are of a transitory nature. “So if 90 to 95 percent of deposits are into a current account, and by their definition, a current account deposit should be available to the owner as and when they require it,

“Even after the banks have closed, with these digital platforms, banks are still able to provide banking services. Therefore, there is a need to build savings, but it will take time,” he said.

Nyazema told this publication that banks are fast running out of internal resources to lend as economic agencies are keeping foreign currency outside the banking system.

Some are preferring to keep their cash in custodial deposits, and that money is not available for lending, he said.

Meanwhile, Nyazema said the banking sector is currently stable, having passed a period in the first quarter of this year where there was volatility, especially in the currency market.

The Government in the second quarter of 2023 came up with a number of measures to deal with inflation.

Nyazema said the reason the average Zimbabwean does not want to keep the Zimbabwe dollar in their account is because he or she is either thinking or aware that next month he or she will buy less than what was bought in the previous month.

“So the Government came up with a number of disinflation measures, and these have been effective. We saw an increase in interest rates and tight liquidity management, especially for Zimbabwe dollars. But the masterstroke was the introduction of the wholesale auction system, where banks bid for foreign currency in their own capacities and then retail that foreign currency to their own customers,” he said.

He added that since the middle of June up until now, customers of banks with international and cross-border payments have had the opportunity to bid for foreign currency and all demand that has been there has been cleared.

“We actually had a strange period around July where, because of the shortage of Zimbabwean dollars, our own customers could not bid for foreign currency that was readily available.

“We had situations where there would be an auction on Tuesday and another on Thursday, and at times the market was taking as little as 40 percent of the foreign currency that was available.

“There was stability that came into the foreign exchange market, and since the wholesale auction was introduced, we have seen an exchange rate of between $4 500 and $5 000,” said Nyazema.

He noted that there was a lot of speculation that it was an election gimmick, “but we had another auction post-election, and demand was met. The average weekly price is US$20 million, and the market has been taking approximately 80 percent of that on offer.” – Business Weekly