Unpacking the January 2021 Monetary Policy resolutions





By increasing the surrender requirement to 40 percent,  the simplistic projection, and, off course, as dictated by the structural make up of our economy, is that flows of surrender money to RBZ would increase to $1,68 billion, with $1 438 billion being from the five major commodities, which are produced from God-given natural resources as highlighted earlier.

As has been observed for a long time now, its very difficult to achieve increased supply of foreign currency from voluntary liquidations (after surrender requirements) by the few major generators of foreign currency as they are also major generators of local currency.

At the current exchange rate of US$1:$82 0833 (January 19-28 2021), surrender liquidation by these major foreign currency earners calculates to $117,215 billion, which is close to the estimated total revenue of $137 billion generated by the Government in 2020 and 28 percent of 2021 budget of $421 billion.

Clearly, there is no incentive for exporters to liquidate their foreign currency retention, especially when they can use US$ for local transactions such as payment of wages and local supplies in the current dual currency regime.

This just strengthen the argument for increasing reliance on foreign currency surrender requirements by RBZ to grow the supply and accessibility of foreign currency by the market.

However, at the current level where exporters seem unhappy with the interbank rate, which according to them is still lower than US$1:$90-100 that they are currently accessing from matching or twinning arrangements, there is need to consider incentives to exporters to compensate for perceived loss in value from increase in surrender requirements under what they consider “suboptimal” exchange rate.

It is therefore unsurprising that RBZ had to extend indefinitely the retention period from 60 days after receipt of foreign currency. Otherwise there is high risk of losing foreign currency through transfer pricing, re-invoicing and even disinvestment.

Whilst it would appear that the average weekly foreign currency inflows from surrender requirements of $32 million are enough to meet the average weekly Foreign Currency Auction requirements of around $30 million, the seasonality nature of these inflows make it very difficult to manage currency volatities.

Cashflows from surrender requirements normally dip in the last quarter of the year to the following year as tobacco marketing seasons ends in August and as mining sector, especially gold, earnings dwindle on account of the annual shutdown and rains, which affect mining operations.

Demand for foreign currency normally peaks up during this period as we seek to import agriculture inputs and support our agriculture sector. In the past we used to rely on the Afreximbank facilities to smoothen this cashflow gap, but this option is now discouraged as this commercial facility has proved to be very expensive at a cost of around 7 percent per annum.

Recent efforts by RBZ to turn the curve by agreeing with banks to advance foreign currency to customers allocated by the Auction System against future surrender liquidations immediately after allocation as part of their financial intermediation is commendable.

It is concerning that whilst the market battles with foreign currency shortages, exporters and other generators of the scarce resource have been sitting on $1,1-$1,3 billion for a long time.

Similarly previous measures by RBZ to extend the surrender requirement to domestic sales, which under dual currency regime, are essentially domestic exports, like earnings from tourist activities, are proving to be helpful.

The same applies to recent measures that require the Government to sell foreign currency from mainly taxes, duties and levies to RBZ to beef up supplies into the Auction system.

Despite these measure there was still pressure on foreign currency owing to delays in settlement on account of high exposure to US$.

Faced with US sanctions, every small US$ arising from Zimbabwe or Zimbabwe linked institutions and individuals, has to go rigorous scrutiny in the US financial system.

As such it is advisable for our financial service sector to reduce exposure to US$ by encouraging customers to insist on non US$ invoices from their trading partners, and, by extension, for RBZ to collect surrender liquidations in currency of invoice.

Currently it appears all surrender liquidation and hence supply into the Auction System are in US dollar, which exposes us to US risk. More than 95 percent of foreign currency transactions in Zimbabwe are in US$.

Its important to emphasise that all the recommended measures are short term and, due to the structural nature of our challenges, only permanent solution can lift the Zimbabwe economy from its deep seated structural challenges.

Re-industrialisation is seen as a permanent solution to our currency challenges due to its potency in lifting our economy up — the value chain as well as diversifying it away from an primary to the secondary sector.

Whilst its comforting that measures to deal with structural challenges are well articulated in National Development Strategy 1, implementation remains key.

Other MPC resolutions of   January 8, 2021 shall be discussed in my next instalment.

Meanwhile let me take this opportunity to remind everyone to be extremely cautious about the deadly Covid-19 pandemic and take recommended and necessary measures to STOP the spread of the pandemic. There is no need for us to spend time and energy in analysing and therefore proffering advice on the economy when all of us are going to be dead

Persistence is Economist, Chartered Banker and Trade Finance specialist. He is also the founder, Futurist and Vision Consultant of Billiion Group. For feedback email persgwa@bulliongroup.co.zw or whatsApp +26377 3 030 691