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Finance minister Mthuli Ncube


FLASHBACK: A brief history of Zimbabwe’s recent currency reform trials



THIS statement was issued by Finance minister Mthuli Ncube in June 2019. Initially, Ncube, who had previously argued that Zimbabwe should adopt the South African rand before joining government when he was at the African Development Bank, had warned that bond notes must go as they represented “bad money chasing away good money”.

THE country has been using the multicurrency monetary system since 2009, dominated by the United States dollar, South African rand. In its early stages, the multi-currency system brought some stability in terms of inflation.

However, the multi-currency system stifled growth, as the country could not utilise monetary instruments to influence economic activity, and gradually lost competitiveness compared to major trading partners.

The situation was worsened by recurrent unfavourable weather conditions, low commodity prices and high appetite for importing. This resulted in declining foreign currency inflows, liquidity and cash shortages, as well as confidence challenges.

The country in response, introduced the bond notes as an export incentive to promote exports and substitute imports. However, the initiatives were not supported by restricted government expenditure. The resulting fiscal deficits were financed through Treasury Bills and recourse to the central bank’s overdraft window.

The financing of the expanding fiscal deficits combined with widening trade deficit, exerted pressure on the foreign exchange market. This resulted in the resurgence of the parallel market whose exchange rate become the anchor of pricing of goods and services in the economy and the attending inflation.

In view of these economic imbalances, government in October 2018 introduced the Transitional Stabilisation Programme (succeeded by National Development Strategy 1), which seeks to address major policy reform areas required for stabilisation, rebuilding and transforming the economy to an upper middle-income status by 2030. One of the key pillars being currency reform.

Currency reform

Government, through two monetary policy statements of 1 October 2018 and 20 February 2019 set the tone for implementing currency reforms necessary for supporting fiscal consolidation and growth promotion.

In order to reduce the impact of the shocks, the currency reform took a gradual process. It started with the October statement, which separated the foreign currency accounts (FCA) and RTGS accounts. The purpose was to encourage exports, diaspora remittances, banking of foreign currency and to eliminate the dilution effect of RTGS balances on nostro FCAs.

This was followed by differential pricing of fuel January 2019 and finally liberalisation of the country’s foreign currency market, through discarding the fixed 1:1 exchange rate peg between the US$ and the bond note through the 20 February 2019 monetary policy statement.

Concurrently, a new currency called the RTGS dollar, made up of electronic balances in banks and mobile platforms, bond notes and coins was introduced through Statutory  Instrument (SI) 33 of 2019.

The intention was to strip the US dollar as a medium of exchange and serve more as a reserve currency. Simultaneously, the RTGS dollar was expected to assume all other functions of a domestic currency.

However, since its adoption, the RTGS dollar has continuously lost value against the US dollar at a pace of, on average, approximately 1% per day. On 25 February 2019, the official interbank rate stood at US$/RTGS$ 2.5, and climbed to US$/RTGS$ 6.28 as at June 21. On the parallel market, rates climbed from US$/RTGS$3.5 to US$/RTGS$12 during the same period.

The devaluation has been ac.companied by rampant inflation in RTGS terms, with many goods and services now being effectively pegged to parallel market rates. As at May, month-on-month inflation stood at 12.54%, and year-on-year inflation at 97.85%. At the same time, prices in US dollar terms remained flat, or even decreased.

Further, there were persistent shortages of foreign currency for productive activities, constraining production and investment, as well as promoting speculative tendencies and capital flight. These developments suggested that the monetary arrangements were not sustainable, and self-dollarisation was gaining momentum.

However, a scenario of formal re-dollarisation was undesirable for the following reasons:

  • Fiscal constraints: Re-dollarisation requires the compensation of salaries in US dollars. Given tight fiscal space, nominal salaries had to be revised downwards to socially unacceptable levels;
  • Loss of competitiveness: The US dollar was appreciating against the currencies of Zimbabwe’s major trade partners, which made Zimbabwean wages and final products too expensive to compete. This resulted in trade imbalances, which was harmful to local industry;
  • Liquidity crises: Given the scarcity of US dollars in the formal market, smooth transacting could not be guaranteed;
  • Loss of monetary instruments: Monetary policy could not effectively manage business cycles and cushion the economy against temporary shocks, and
  • Vulnerability to sanctions: Accessibility of US dollar is constrained by restrictive measures affecting transactions with international banks.

There was, therefore, an urgent need for Zimbabwe to introduce its own fully-fledged currency and to formally end the multi-currency regime, through the introduction of SI 142 of 2019, which was further operationalised by the Exchange Control Directive RU102/2019.

The directive was issued in terms of Section 35 (1) of the Exchange Control Regulations Statutory Instrument 109 of 1996.

Local currency

Under the new framework, all domestic transactions are now settled in Zimbabwe dollars, the sole legal tender in Zimbabwe that is represented by bond notes and coins and electronic currency, that is, RTGS dollars.

This effectively means the use of foreign currency to settle domestic transactions has been removed and the basket of multi-currencies, that is, USD, GBP, ZAR, EUR, BWP, JPY, CNY, AU$ and Indian Rupee shall only be used to settle international payments or those services exempt from this requirement as per Section 3 of Statutory Instrument 142 of 2019.

Similarly, the pricing on all domestic contracts, including the displaying of prices in all outlets in Zimbabwe, shall be effected and/ or displayed in the local unit of account.
The operation of Nostro FCAs shall remain in place for purposes of receiving offshore funds and to facilitate foreign payments.

In cases where local service providers e.g. transporters, consulting firms, etc, are paid from offshore sources for services rendered locally, such funds shall continue to be deposited into the Nostro FCAs.

These funds in Nostro FCAs will retain their foreign currency status and shall continue to be utilised for the settlement of international transactions. In cases where the holder of such an account intends to settle domestic transactions, they shall be required to liquidate their foreign currency account balances to the interbank on a willing seller willing buyer basis.

Foreign currency cash withdrawals by corporates have been removed.

However, on deserving cases such as road toll fees, corporates may such withdrawal cash subject to Banks applying the Know Your Customer (KYC) principles.

Individuals shall continue to hold US dollars in their nostro FCAs, as well be able to withdraw cash up to a daily limit of US$1 000, as it was previously the case.

The government through the RBZ has assumed all legacy debts arising from the changeover from the 1:1 exchange rate between RTGS and US dollar as announced through Exchange Control Directive RU28 of February 2019.

All RTGS dollars representing the legacy debt shall be moved from commercial banks to the RBZ which will reduce the amount of Zimbabwe dollars in circulation by at least US$1.2 billion, thus strengthening the value of the Zimbabwe dollar. This is further going to be supported by the review of the overnight accommodation window which has been pegged at 50% per annum.

The Reserve Bank shall sell 50% of the foreign exchange realised from surrender requirements to the interbank market to complement letters of credit for the importation of essential commodities that include fuel, cooking oil and wheat.

With effect from 25 June 2019, authorised dealers (banks and bureaux de changes) are permitted to buy and sell foreign currency without any limit in terms of the amount and margins.

This has effectively made our foreign exchange market freely floating.

The payment arrangements and foreign currency retention periods for large scale gold producers shall continue as before.

However, small-scale gold producers with nostro FCAs shall not be subjected to the 30 day retention period.

Tobacco growers are entitled to receive 50% of their sales proceeds in United States dollars (it is now 60%), deposited into their nostro FCAs, however, in the event that the tobacco grower intends to meet local obligations, the sale proceeds must first be converted to Zimbabwe dollars through the interbank foreign exchange market.

Where there is need for tobacco merchants to disburse working capital to
contracted farmer, the proceeds shall be deposited into the grower’s nostro FCA (special) which can be opened with a bank of their choice.

The tobacco farmer shall then liquidate the proceeds from the nostro FCA (special) to meet local obligations. The current cotton marketing arrangements shall continue to operate.

Investors who shall purchase dual listed shares on the Zimbabwe Stock Exchange (ZSE) shall only sell the shares on the ZSE or on an external stock exchange after a vesting period of 90 days from the date of initial purchase.

To encourage and facilitate the flow of foreign currency, diaspora remittances shall continue to be received in foreign currency. The recipients shall have the option to receive remittances in cash or sell their remittances on a willing seller willing buyer basis to bureaux de change and authorised dealers or deposit into individual nostro FCA.

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