THE Reserve Bank of Zimbabwe (RBZ) governor, Gideon Gono, this week relaxed foreign exchange regulations to allow the market to determine the rate.Â
Although the modalities of the programme were still unclear, Gono said the foreign currency reforms would be based on a willing buyer and willing seller basis.
That means that the market will determine the rate of exchange on the foreign currency market.
Analysts however say the impact of this reform will depend on the support of a proper fiscal policy and political stability.Â
Gono introduced the Priority-Focused Twinning Arrangements for the foreign exchange market in which authorised dealers and Money Transfer Agencies (MTAs) will match sellers and buyers of foreign exchange under a predetermined list set by the RBZ.
The dealers and MTAs will be required to submit to the RBZ details of the willing buyer-willing seller transactions after 14 days for certification of compliance.
MTAs and authorised dealers will charge a margin 0,25% on every transaction they processed.
They will be required to keep a foreign exchange float of a maximum of US$100 000 and sell any excess to the RBZ at the prevailing inter-bank rate.
“It has become necessary that the pricing and allocative frameworks in the foreign exchange market be reformed in a manner that guarantees viability for all generators of foreign exchange, whilst at the same time, ensuring availability and affordability of this resource to users of foreign currency, particularly the non-exporting producers of basic goods and services,” Gono said.
Food and food-related items top the priority list with a weighting of 35% of the foreign exchange to be allocated.
The fuel and electricity sectors will receive 20% of the foreign currency while non-food industrial inputs, machinery and spare parts will also receive 20% of allocated foreign currency.
The medical sector – drugs, consumables and equipment – will receive 10% while school and professional fees, IT licences and dividends which have been categorised together will receive 10% of foreign currency allocated under the new reforms.
Gono said in making these reforms, the RBZ had made “a great leap forward of trust and faith” but announced that severe penalties awaited those who violated the set guidelines.
Authorised dealers and MTAs that violate the set guidelines by allocating amounts less than US$2,5 million will be required to pay to the central bank a penalty 10 times the amount in breach at the government rate of $30 000:US$1.
Any breach in excess of US$2,5 million will result in the suspension of authorised dealers or MTAs foreign exchange trading licence.
The RBZ also unveiled new and very liberal measures aimed at stimulating growth of foreign exchange revenues in the country and addressing the Foreign Currency Account (FCA) retention levels.
Export growth of 10% will result in exporters retaining 75% of their foreign exchange proceeds.
This means exporters will have to sell 25% of the earnings to the RBZ.
Export growth of 20% will result in FCA retention levels of 85%.
Growth of 30% will attract FCA retention levels of 95% while growth of above 35% will result in exporters selling only 2,5% to the RBZ and retaining 97,5% of their earnings in the FCAs.
However, things did not change for exporters in terms of FCA retention periods. Exporters are still required to hold their earnings in corporate FCAs for 21 days before it is sold to the inter-bank market.
Non-governmental organisations (NGOs), embassies, international organsations and Zimbabweans in the Diaspora will be allowed to sell their foreign currency to authorised dealers of their choice at displayed inter-bank prices arising from willing buyer-willing seller arrangements.
The market is however still unsure about the import of the reforms.Â
However, economists were not agreed as to whether the raft of measures amounted to a devaluation of the Zimbabwean dollar.
University of Zimbabwe economics lecturer, Professor Tony Hawkins said reform measures represented a huge devaluation.
“It is a mega-devaluation. However, it still shows serious incoherence of government policy when you look at the exchange rate given to tobacco farmers the previous day. Still, it is a great step forward,” Hawkins said.
Another economist, John Robertson said Gono’s monetary policy was confusing and that it was unclear whether Gono had devalued the dollar or not.
“It is still too confusing,” said Robertson, “We still have the official government exchange rate of $30 000: US$1. If the interbank rate is adopted as another official rate, with rates of the prevailing $150 million for every US dollar, then it would be too absurd.”
Robertson said new reforms would work only if government interference was minimal.
He said a repeat of what happened in 2004 when the RBZ introduced the foreign currency auction system only to withdraw it a short while later would be disastrous.
Independent economist Dr. Daniel Ndlela said the Priority List set by the RBZ had its flaws and said that refusals by government to use a unified exchange rate would result in the parallel market competing with the interbank and quasi-official rate.
Ndlela said Gono had not devalued and insisted that the official exchange rate remained $30 000:US$1.
“People who have access to foreign currency at the rate of $30 000 for the US dollar and are beneficiaries of patronage will still get that money and continue to abuse it. The bank rate is obviously an improvement but there been no devaluation,” Ndlela said.
“The economy is the equilibrator. It destroys all speculative activity,” Ndlela said.
The problem that exists with this new system is that importers will be willing to pay low rates while holders of foreign exchange will want higher rates, said Ndlela.
He said the failure by the RBZ to include importers of luxury goods on the priority list would result in them paying higher rates for foreign currency.
“People will obviously gravitate towards the higher rate,” Ndlela said.
“The speculators can’t go to the banks but they pay higher rates. The parallel market will lead as the people with funds and the Diaspora people will watch and go where the higher rates are.”
By Kuda Chikwanda