How the RBZ is shifting the terrain

BY INTER HORIZON SECURITIES 

AS opposed to 2019 during which fiscal policy often seemed at odds with monetary policy, there was a better alignment in 2020 with both arms focused on price and exchange rate stability with adherence to a set monetary targeting framework.

On June 23 2020, a foreign currency exchange auction system was introduced, replacing the previous exchange rate peg of US$1:$25.

Since its introduction, in late June, a total of US$795 million has been allotted with an average weekly traded amount of US$22,32 million.

Since inception the auction rate has averaged US$1:$82 versus our own observation of parallel rates at an average of US$1:$113, implying a premium of 25% to the auction rate.

At this point it appears that a significant portion of the US dollar liquidity trading in the auction market has been injected directly by the central bank from the 30% export retention dollars.

It is unclear to what extent exporters have participated on the sell side.

In April 2020, a statutory instrument (SI) was announced liberalising the use of free funds and effectively allowing businesses to charge for goods and services in US dollars.

In order to further support the auction system, 20% of foreign currency receipts from providers of goods and services is liquidated at point of depositing same currency in the domestic FCA.

Since inception of the auction system, the Zimbabwe dollar has marginally appreciated, creating a relatively more enabling environment for businesses.

Annual inflation peaked at 837,58% in July 2020 and has been on a gradual decline, closing at 348,59% in December 2020.

Growth in money supply is expected to ease following the removal and reduction of subsidies on electricity, fuel and agriculture input schemes, reducing the need to print money.

Significantly, a decision was reached to place severe restrictions on mobile money platforms.

According to the central bank, a forensic audit revealed deficiencies which include the creation of fictitious accounts with unverified Know Your Client information, the creation of money via overdrafts and fictitious unbacked credits, the abuse of agent, super-agent and bulk payment wallets for the illegal trading of foreign currency on the parallel market among other charges.

As a result, a series of interventions have been announced, which include the abolishment of agent lines, restriction on use of bulk payment wallets to low value transactions and humanitarian funds disbursement and caps on individual transactions to
000 per day.

All payment platforms including mobile money operators are required to be connected to Zimswitch Technologies, a national switch platform which the central bank can monitor in real time.

Our view: The reality is that mobile money platforms had become the ideal spot market for parallel market transactions and the possibility is high that the volumes and velocity of these transactions had surpassed the volumes in the legitimate channels of same platforms.

The export retention threshold for all exporters was standardised at 60% in early 2021 and the liquidation period for unused funds was adjusted to 60 days from 30 days to allow exporters adequate time to plan their cashflows.

Our view is that the new structure under the auction which allows exporters to submit offers at a reserve price of their choice is a progressive step in protecting value for the hard-earned foreign currency of our producers relative to the previous peg system.

The overnight accommodation rate was set at 25%, however, our observation is that this may have ceased to be a meaningful indicator within the banking sector as banks took a cautious approach to lending given year-on-year inflation in excess of 400% throughout the year.

It goes without saying that the country continues to face sustained macro and political headwinds.

However, the impact of Covid-19 was less pronounced than expected.

The current stability in the exchange rate will likely lead to a sustained tapering-off in month- on-month inflation, including in pure Zimbabwe dollars.

Third quarter government revenue stood at $57 billion, surpassing the targeted $44,83 billion by 27,16%.

Statutory Instrument 185 of 2020, which legalised the use of a dual currency system, was aligned with the provision of section 4(a) of the Finance Act requiring that tax be paid in the currency of transaction.

Not all institutions have been compliant in this regard and we are still to see a corresponding uptick in US dollar tax revenue.

Government revenue as a percentage of gross domestic product (GDP) is expected to take an upward trend and close 2021 at 14,51%.

The major expenditure outlay remains related to employment costs, which rose from 48% of total revenues in 2009 to a peak of about 78,3% in 2017, before receding to 61% in 2018.

Currently, employment cost as a percentage of revenue stands at 40,63% and is expected to remain in range until 2023 as government continues to rein in on spending.

In light of the pandemic, it is our view that there might be downside expenditure risk in the form of further unanticipated emergency relief funding and social safety nets paired with pressure from labour unions for upward review of civil service salaries.

According to the 2021 National Budget, public debt as at the end of December 2020 stood at $1,547 billion.

Although public debt to GDP has improved from 88,1% in 2019 to a revised estimate of 78,4% in 2020, this is notably above the 60% threshold recommended by Sadc but also a reflection of the ongoing debt crisis in Sub-Saharan Africa.

Domestic debt accounted for an estimated 1,8% of total public debt.

However, external debt went up by US$106 million for nine months ending September 2020 to US$8,02 billion.

Arrears amounted to over 77% of this balance with no concrete debt settlement plan.

We foresee public debt remaining in a critical condition with penalties on overdue debt mounting as the government currently does not have the capacity to service them.

The country risk will also make it difficult to access further loans which might end up driving up domestic debt figures.

Government moved to remove fuel and electricity subsidies, with all remaining and targeted subsidies accommodated in the budget.

Fuel subsidies alone accounted for US$100 million monthly expenditure, adding considerable strain on the fiscus.

The removal of the subsidies especially in the energy sector helped slow down the ballooning foreign debt from which they were being partially funded from.

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