Economic analysts have welcomed the measures announced by Finance and Economic Development Minister Mthuli Ncube on Monday to stabilise the country’s economy and the depreciating Zimbabwe dollar.
Among other things, Ncube said with effect from 01 June 2023, Treasury will now fund the Zimbabwe Dollar component of the 25% foreign currency surrendered by exporters. He said this will eliminate the creation of additional money supply.
Ncube also announced that weekly auctions will be limited to a maximum of US$5 million and winning bids at the auction will be paid within 24 hours.
Commenting on the development, economic analysts ZimBollar Institute, said the measures are progressive if “followed to the letter and spirit”. Said ZimBollar Institute:
To understand the logic behind the (Ministry of Finance and Economic Development) MoF’s measures, one needs to appreciate the mechanics of the foreign currency auction system in terms of its funding. Here we make an attempt to explain.
Exporter A produces and exports goods worth of USD1m. On processing their CD1s, their Bank takes 25% or USD 250k in line with the 25% foreign currency retentions for onward transmission to the RBZ
On receipt of the USD250k, the RBZ is mandated to settle Exporter A with the equivalent of USD250k in ZWL local currency. This effectively increases the supply of ZWL in circulation through the money creation cycle.
The USD250k is then subsequently utilized to settle auction bids at the RBZ Tuesday auction system per the Dutch auction. Since this money is used to settle imports, it effectively represents a drain on forex, since it leaves the country’s borders on payment.
Now look at this: The same ZWL that the RBZ injects as it settles forex retentions will find its way back to demand for foreign currency, hence the huge demand for cheap forex that has remained a perennial phenomenon.
Enter Mthuli’s interventions:
By allowing duties and customs to be settled in ZWL, the MoF has created a demand for the ZWL. Using the same ZWL, Gvt will have the capacity to settle the 25% USD retentions without recourse to printing since they already sit on tax revenue
Three things will happen:
a) Demand for ZWL dollar increases and effectively contains the exchange rate
b) Speculative demand for the USD decreases on account of the auction limit of USD5m
c) By using tax revenues to settle forex retentions they will contain money supply.
Masterstroke if followed to the letter and spirit.