Zimbabwe central bank takes aim at forex speculators

Professor Mthuli Ncube
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Government says the sharp hike of the overnight bank rate by the Reserve Bank of Zimbabwe to support the domestic currency will discourage borrowing for currency speculation  as well as protect the value of the local unit, but will subsist only for a few months before being cut down.

According to Treasury, speculative borrowing from banks was fomenting illegal forex dealings on the parallel market, which had dire consequences on prices.

To tame widespread market indiscipline, Government removed the multi-currency through Statutory Instrument 142 of 2019. This was to avert forced re-dollarisation when Zimbabwe is facing a US dollar crunch, which saw the central bank swiftly move in to back up with a series of monetary interventions.

Some of the measures by the central bank included increased foreign currency allocations to the interbank to reduce pressure on demand for forex, relaxed forex trading terms for banks and bureaux de change and tightening rules for operation of corporates’ nostro foreign currency accounts.

While the intervention through monetary instruments will target the twin evils of parallel market currency speculation and negative impact of low interest rates on inflation, Treasury indicated it was acutely aware of the potential costly implications of high interest rates on the economy.

The Reserve Bank hiked the overnight bank or accommodation rate from 15 to 50 percent per annum after the Government, through the Ministry of Finance, gazetted Statutory Instrument 142 of 2019, which brought an abrupt end to the multi-currency adopted and in use since February 2009.

The overnight rate is the interest rate the central bank sets to target monetary policy objectives and determines banking industry lending rates.

In most circumstances, the rate is the lowest available interest rate, and as such, it is only available to the most creditworthy institutions.

Finance and Economic Development Minister  Mthuli Ncube told the Parliamentary Committee on Budget and Finance on Monday that the high interest rate regime was introduced to curtail speculative borrowing and tame the tide of rising inflation, but would be in force for only a few months before being revised downward.

Appearing before the committee together with secretary for finance George Guvamatanga and Reserve Bank of Zimbabwe governor John Mangudya, Minister Ncube said he was aware of a corporate that borrowed to take position in foreign currency bought on parallel market.

The foreign currency parallel market has been blamed for fueling exchange rates volatility on the informal market thereby driving inflation rates.

Zimbabwe’s annual rate of inflation reached 97,85 percent in May from 75,8 percent in April, as prices of goods and services kept rampaging on the back of the impact of pass through effects of the sustained wild swings in parallel market foreign currency exchange rates.

The majority of Zimbabwean corporates, as well as individuals, who cannot obtain foreign currency on the formal market, use the parallel market.

“There is a reason why we increased the interest rate sharply. It was meant to do two things; first of all it was to deal with speculation that we had spotted in the market.

“I know of one specific company that was now borrowing domestic RTGS dollars and then using the borrowings to take positions in foreign currency.

“(They would) make some US dollars, put the US dollars in their foreign currency account and then start all over again.

“Why? Because we have a large negative real interest rate (regime), so they are smart; that is what they do.

“So, we said let’s close that gap and deal with speculation,” he said.

Minister Ncube, however, pointed out that the interest rate regime had not been raised to a level higher than the prevailing annual rate of inflation, which stood at 97,85 percent for the month of April. As such, even at 50 percent the bank rate remains significantly negative and below inflation.

“The other issues were really one for dealing with inflation because in terms of inflation; the last figure was really close to 100 percent and our interest rates averaging 12 percent or so (are too low).

“These interest rate levels were just too low to deal with inflation levels that are prevailing,” he said.

The minister said while the interest rate regime was a blunt instrument that would affect both good and bad borrowers, it was the prerogative of the banks to give borrowers low rates on the strength of the know your customer (KYC) principle, which would see credible borrowers getting low priced loans.

The Treasury chief said as policy makers, their responsibility was to create the basis upon which the banks can determine appropriate interest rate benchmarks in tandem with credit scores of their customers.

“But I must hasten to say this is temporary, it will last only a few months and then after that you will see the interest rates begin to down because we are also acutely aware that high interest rates for an extended period of time will be negative for the economy; we are aware of that,” he said.

Commenting on the same issue, Mr Guvamatanga said the interest rate regime was adopted with a view to preserve value of currency, including the need to protect vulnerable like pensioners.

“Paying an interest rate that is not related to inflation destroys value for the savers and those are the pensioners that we are talking about. So, we need to strike a balance production…as well as protect the value of pensioners and also encourage savings,” said