Government has plans to overhaul the country's interbank foreign exchange market amid concerns that the current system is fraught with irregularities.

For central bank authorities, the move is an admission that the interbank market which was introduced in February is not very efficient.

Nearly 10 years after the introduction of the multicurrency system, the adoption of the interbank foreign exchange system effectively devalued the local currency which was initially pegged at par with the United States dollar.

While the liberalisation of the foreign exchange market was a step in the right direction, we continue to argue that the decision was ill-timed and not backed by the right fundamentals.

The fundamentals include a minimum of foreign exchange reserves equivalent to one year of import cover, now said to be less than one week’s import cover, according to credible sources at the central bank. Mangudya did not respond to enquiries on the foreign exchange reserves yesterday.

 The other fundamentals are that Zimbabwe should have a balanced and sustainable government budget, high consumer and business confidence, a sustainable level of inflation, and a healthy job market. All these have not been met. 

The foreign exchange policy has failed to deal with the economic crisis as Zimbabwe’s current account remains in a precarious position. The greenback has remained an elusive commodity and increasingly some formal businesses are relying on the parallel market to meet their foreign currency demands.

The official rate on the market as at close of business yesterday the interbank rate stood at 16:1 against the black market rate of as much as 22:1 against the greenback.

According to the central bank some banks are selling foreign currency at ZWL$30 for US$1, which on one hand speaks on manipulation of the system and supply side gap on the other hand.

From February 22, 2019, to October 11, 2019, cumulative interbank purchases amounted to a lowly US$173 million, while total sales amounted to US$165 million.

With the new interbank market, the government expected it to provide significant positive effects on the economy and domestic production, which is currently very low.

Zimbabwe’s economy has been on a serious downturn in the past two years - being ravaged by hyperinflation, cash shortages, and fuel and electricity shortages.

The southern African nation has also missed several of its macroeconomic targets. The government has been targeting an economic growth rate of 3.1% by the end of 2019. But there is economic recession, and the economy is expected in fact to contract by 6.5% this year. There is runaway exchange rate volatility when the government was targeting inflation to be around 5% by year-end. With annual inflation hovering around 400 percent, a rebound in 2020 is highly improbable. Let us go back to the basics.

High Court judge, Justice Happias Zhou yesterday set aside Statutory Instrument 205/2018 which gave legal effect to the Intermediated Money Transfer Tax which is commonly known as the 2 percent tax on all electronic transactions.

Last October Treasury introduced the tax to widen revenue streams and narrow fiscal deficits. Years of fiscal indiscipline left government walking on a tight fiscal rope. With no budgetary support government has struggled to finance capital expenditure and fund social spending. Official figures show that as of January this year, government was collecting nearly $100 million a month from this tax.

The introduction of the tax immediately attracted public outrage after prices of basic goods and services shot up the roof. Authorities said revenue collected from the tax would be vital in upgrading the country’s infrastructure. There were few takers on this narrative.

Pro-democracy activist, Mfundo Mlilo through his lawyer Tendai Biti challenged the lawfulness of the statutory instrument, which was also widely criticised for being inflationary.  Before this latest development the High Court in February reserved ruling in an application by pro-democracy activist Mfundo Mlilo, who is seeking an order to suspend the imposition of the two percent electronic transactions tax introduced by Finance minister Mthuli Ncube last year. Law experts argued that the statutory instrument should have been debated in Parliament.

Zimbabwe annual inflation for June this year reached 175.66 percent this year, the highest in 10 years and this has piled pressure on authorities to tame the soaring prices. As prices soared so did political temperatures. Government, which introduced austerity measures in its 2019 National Budget was left with limited fiscal space when civil servants pushed for a salary hike.

The High Court ruling comes nearly a week after the Reserve Bank of Zimbabwe governor John Mangudya last week announced his Monetary Policy Statement.

The policy statement came at a time the economy is facing inflationary pressures emanating from a litany of factors such as the lagged effects of monetisation of past fiscal deficits, market correction, spiralling parallel exchange rate premiums and speculative pricing.

Premiums on the exchange rate on bank notes and electronic money have been widening reflecting on increased demand for the notes. The central bank said it would drip-feed new notes into the economy to ease cash shortages on the market.

To arrest rising inflation the RBZ, among other measures introduced high interest rates which will curtail speculative borrowing to buy foreign exchange on the parallel market and a flexible exchange rate will assist in absorbing external shocks and ensuring that the external position is sustainable.

While these measures are key in containing inflation, Zimbabwe’s economy continues to face structural deficiencies and headwinds which stifle domestic production. As bureaucrats at the Finance ministry burn the midnight oil, crafting the 2020 National Budget, we anticipate that government will increase taxes to offset losses resulting from the High Court order.

Reserve Bank of Zimbabwe governor John Mangudya last week announced his Monetary Policy Statement while the country was mourning the death of former President Robert Mugabe.

The policy statement came at a time the economy is facing inflationary pressures emanating from a litany of factors such as the lagged effects of monetisation of past fiscal deficits, market correction, spiralling parallel exchange rate premiums and speculative pricing.

Premiums on the exchange rate on bank notes and electronic money have been widening reflecting on increased demand for the notes. The apex bank said it would drip-feed new notes into the economy to ease cash shortages on the market.

This development also comes at a time when reports show that crispy new notes are finding their way onto the parallel market. The central bank denies these claims. The current shortage of physical cash has led to a supply and demand disequilibrium, and arbitrage opportunities for differential pricing models, depending on the mode of payment.

In February this year, the central bank formalised the trading of foreign currency by introducing the inter-bank foreign exchange market and licencing of bureaux de change. Back then trades where managed and there was a huge discrepancy between the parallel market and the formal sector.

RBZ governor John Mangudya now sees inflation softening in the short to medium term mainly due to the discontinuation of Central Bank financing of Government deficits to curtail money supply growth; high interest rates which will curtail speculative borrowing to buy foreign exchange on the parallel market and a flexible exchange rate will assist in absorbing external shocks and ensuring that the external position is sustainable.

While these measures are key in containing inflation, we contend that Zimbabwe still has to address its external sector as well as stimulate domestic production. The latest figures from the RBZ show that South Africa and Singapore are still the country’s major sources of imports. Imports from South Africa reflect on the state of the country’s manufacturing sector while fuel imports from the south east Asian country contribute the bulk of imports.

 Currently most companies are facing bottlenecks in buying foreign currency for their raw materials and their balance sheets have weakened following the introduction of the mono-currency regime. Early this year, the central bank committed to take over legacy debts resulting from the monetary reforms. The bank is yet to settle these debts and companies are already feeling the heat.

It is our view that the country’s monetary policy statement is not being effectively being complemented by the fiscal side. As the local currency weakens, inflation soars, public spending is also gradually rising. Civil servants are demanding higher salaries and with no budgetary support the central bank will be forced to inject more liquidity into the market, a decision which is inflationary. The onset of the summer cropping season and a push for more support on the Command Agriculture programme will also result in sharp spike in money growth.

It is our view that under the current circumstances, the central bank’s tools to manage inflation will have a limited effect.