Short-term focus by Zimbabweans reason for depreciating Zimdollar – RBZ governor

The Reserve Bank of Zimbabwe (RBZ) governor, Dr Mangudya, sat down for an interview with Trevor Ncube. We got another look into the man’s mind. He called for respect when we do disagree as Zimbabweans so let’s respectfully consider what he has to say about the economy.

The Zimbabwean local currency

The history of Zimbabwe and its currencies is a complicated one. It is no wonder then that there is confusion in the market about the current local currency. The doc reminded us that:

• The currency of the land is the Zimbabwe dollar, denoted ZWL or ZW$. It is not the RTGS$, although it was launched as such, which led to the confusion. 

• The bond note was not a currency and was phased out. The notes we have today are the Zimdollar.

• We don’t have Nostro accounts, what we have are FCAs, foreign currency accounts. The accounts that banks in different countries hold with each other remain the only ‘Nostro’ accounts. Yes, even the Finance ministry does refer to FCAs as Nostros but we have not adopted and redefined Nostro for the Zim economy.

The bond notes

We have had the discussion on why the RBZ governor maintains that bond notes were a success. If we act like economists trying to teach a concept and use the ‘all things being equal’ qualifier, and squint, it does appear that under some kinds of light, the bond note was a success. Read more on that here.

In this interview, he affirmed the same and went further to say that the bond notes did not even lose value the whole time they were in circulation. On this one, no amount of squinting will make us see it as the good dokotela does. Bond notes lost value and that is a fact.

Mangudya says the bond note traded at 1:1 with the USD until its phasing out in 2019. To be fair, that is accurate. However, that was the govt’s pegged rate which was very different from the market rate. On the parallel market, the bond note was worth far less than the USD. A little like it is today with the Zimdollar which has a higher value according to the RBZ and its auction rate than on the actual market the average Zimbabwean has access to.

The forex auction

Mangudya says he is happy with the performance of the forex auction. He says it has achieved its goals and more. How could he possibly think that?

Price discovery

He feels the auction rate allowed us to value the Zimdollar. He therefore believes that is the accurate valuation of the Zimdollar. For the rest of us, the parallel market already did this before the auction rate came along. And it’s more accurate too.

He pointed out that Zim banks do not trade with each other for various reasons. The main one being that they don’t trust each other because of compliance issues. The Zim banks also don’t trade with foreign banks because of several geopolitical reasons. Therefore there really was no interbank market in Zimbabwe.

What he is getting at here is that the interbank market, in normal circumstances, is the main market for the trading of forex in an economy. Banks trade on behalf of clients and also for their own benefit. This interbank market therefore is the one where we discover the real price of currencies. So, when Mangudya says there was no interbank market in Zimbabwe, he is convinced that there was no accurate price discovery before the forex auction came.

Redistribution of foreign currency

The RBZ forces exporters to liquidate 40% of their export receipts at the interbank rate and this forex is what companies bid for on the forex auction. The forex auction is also funded by our trusty friends, Afreximbank and from the forex that is freely traded in the banking system. 

How much are people freely trading with banks when it’s at a rate lower than the parallel market? Not much. So, the main source of funds on the auction is the 40% liquidation of all export receipts. The most exports are from mining.

Other companies that are not exporting but need forex for their inputs, especially those in manufacturing can then bid for that money and fund their operations. Without the auction, these companies would have to visit the parallel market. 

The only problem is that Zim is dominated by informal traders and small businesses that don’t qualify to participate on the auction floor. These businesses still need forex and they get it on the parallel market. Also, those that do participate in the auction are not getting all their forex needs and are turning to the parallel market to supplement the auction proceeds.

This means the auction is not accurate as a price discovery mechanism. Neither is it successful as a forex redistribution tool. The lifeblood of the Zim economy does not participate in it.

Accessibility to forex

What I found funny is that Mangudya believes the average Zimbo can just walk into a bank and trade their Zimdollars for USD at the auction rate and be on their way. He thinks that’s where we are getting the forex to pay school fees, rentals etc. In reality banks only buy from us at the low interbank rate, they don’t sell USD to us at that rate. There never is any forex to trade to us.

Even small and medium sized businesses are not getting all their forex from the auction. Their demand for forex is much higher than the supply on the auction floor. Mangudya claims though that this demand is excessive because of non-economic factors discussed later.

The parallel market

Dr Mangudya thinks in terms of the whole economy and so his eyes are on the large players in Zimbabwe. As he should, as governor of the RBZ. However, I fear this makes him a little blind to the realities for the average person.

He was asked about the gap between the official exchange rate and the parallel market exchange rate. From his response, he does not believe that the RBZ is responsible for the gap. He blames short-termism on our part as Zimbos, for wanting to get rid of Zimdollars at all costs.

People have got this heart, that obsession, that requirement to always hold foreign currency. They think it’s a more stable currency, which it is also.

Dr John Panonetsa Mangudya

Apparently, you guys are too focused on limiting your losses from the drop in value of the Zimdollar. You should not be too narrowly minded as to protect yourself against inflation by exchanging the Zimdollar for a more stable currency.

You should think about the long term impact this has on the Zimbabwean economy. Do you not see that we need our own currency so that we can manage the economy effectively through monetary policies. Do you want to go back to the deflation era when we exclusively used foreign currency? Huh?

Mangudya says the demand on the parallel market is driven by non-economic factors. He stresses that this demand is not for importing but rather to store value in a more stable currency or to take advantage of arbitrage opportunities. We all agree with this and wonder why he thinks this revelation would be a surprise to us.

You would be surprised that the demand factor for foreign currency is a store of value demand as opposed to the import demand for foreign currency.

Dr John Panonetsa Mangudya

In closing

He does acknowledge that Zimbos have been through hyperinflation and deflation, roller coaster-rides and stability, and so find it hard to trust the RBZ and its banks. Hence, the difficulty in maintaining the value of the Zimdollar as people just don’t trust it. The RBZ is trying to steady the ship though and you can read more about that here.

There is more, arguably juicier, stuff from this Dr Mangudya interview and that will follow. It is always a bit of entertainment to hear from the RBZ governor because he always seems to see things just a little bit differently from us, the lay people.