Gold tokens have already surpassed gold coin sales, the interbank rate empowered to succeed and more monetary policy tweaks

Day by day, the Zimbabwe government is admitting that the forex auction was a mistake. It is the main reason for the Zimdollar tanking. They won’t come out right and say that but their changing tune when it comes to monetary policy is revealing.

The Monetary Policy Committee held a meeting yesterday and pretty much admitted defeat. It might be too little too late for the ZW$ though.

PRESS STATEMENT

RESOLUTIONS OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 6 JUNE 2023

The Monetary Policy Committee (the MPC) of the Reserve Bank of Zimbabwe (the Bank) met on 6 June 2023 and deliberated on macroeconomic and financial developments in the economy. The MPC also deliberated on the progress made in the implementation of measures announced by the Honourable Minister of Finance and Economic Development on 11 May 2023 and 29 May 2023, respectively, to address the recent volatility in the exchange rate and prices of goods and services in the economy.

The MPC noted that the prevailing volatility in the exchange rate emanated from both supply and demand side factors. The supply side factors reflected the transitory reduction in foreign currency inflows, while the demand factors reflected the sustained value-preservation demand for foreign currency in the economy. In order to complement the measures announced by Government, the MPC resolved as follows:

Supply Side Measures

The following measures shall be implemented to address supply side foreign currency constraints:

i. With effect from 7 June 2023, the Bank shall sell foreign currency at the market-determined exchange rate through banks to support and strengthen the foreign exchange interbank market, and banks shall in turn sell the foreign currency to their customers. This measure is calculated to ensure that the interbank forex market is the primary source for foreign exchange needs in the economy and that the foreign exchange auction system shall continue to operate for meeting smaller requirements for foreign payments and for continuous price discovery. Thus, in order to ensure that the interbank forex market is self-financing the 90-day liquidation requirement on export proceeds will fall away.

ii. The current interbank maximum trading limits shall be reviewed upwards from US$100 000 to US$500 000, consistent with the current auction limits;

iii. The main and MSME auction will be merged under the US$5 million per week policy, with bid limits of a minimum of US$1 500 and a maximum of US$50 000; and

iv. The trading margins charged by banks on foreign exchange transactions will be aligned with international best practices.

Demand Side Measures

To address the demand side factors, the MPC resolved to adopt the following measures:

i. Increasing the Bank policy rate from 140% to 150% per annum, in response to the recent increase in inflation;

ii. Increasing the Medium-term Bank Accommodation (MBA) interest rate from 70% to 75% per annum; and

iii. Increasing the Statutory Reserve Requirements on local currency demand and call deposits from 10% to 15%, while maintaining savings and time deposit requirements at 5%.

The Bank remains committed to continuing with the current tight monetary policy to restore and sustain the exchange rate and inflation stability. The issuance of gold-backed digital tokens to augment physical gold coins as a value preservation instrument has gone a long way in mopping up excess liquidity from the market. To date, the Bank has sold to the market ZW$31.8 billion and ZW$35.2 billion worth of gold coins and gold-backed digital tokens, respectively. The rolling out of digital tokens for transactional purposes in the second phase, which is projected to commence during the month of June 2023, will buttress the current stabilisation measures.

John P Mangudya

Governor

6 June 2023

Gold tokens popular

The gold tokens only went on sale last month but it appears there have been more gold token purchases than there have been physical gold coin purchases – $35.2 billion vs $31.8 billion.

I doubt that those figures are inflation-adjusted and so they don’t capture the actual value of gold coins when they first went on sale, especially.

There is also the small matter of gold coins being harder to sell in larger quantities because they actually have to produce the coins. That means they need to have the gold and they need to mint it into coins.

With the tokens we are promised that the gold is there, somewhere. However, the RBZ does not need to mint any coins. They just store the gold in a vault.

Can we confirm that the gold really is there? We cannot. So there will always be more tokens to sell than coins. I’m just surprised people have been buying them this much.

The interbank rate

The RBZ wants the interbank rate to be the sole determiner of the exchange rate. Not their auction rate. So, the RBZ itself will sell at the rate interbank rate.

They realised that their 90 day liquidation requirement would still limit the supply of USD to the banks, rendering the interbank rate inaccurate. If you had forgotten the liquidation requirement compulsorily converted a portion of people’s USD to ZW$. That forced liquidation is gone now.

Exporters or depositors I guess, can keep their USD in their account for as long as they want without being forced to convert some of it to ZW$.

This is how it should have always been and so we can’t really congratulate the RBZ or this move.

What’s annoying about this is that it is all too late. Who in their right mind is going to trust them and deposit USD long-term in the formal financial sector? Very few. The ZW$ is doomed and now we get the sensible policies we were crying out for for years?

The black market will most likely keep outpacing the interbank rate in spite of the above measures. Meaning arbitrage opportunities will still remain.

Yesterday, the interbank rate was at around 1:2770 whilst the black market rate reached as high as 1:4600 (or even higher) in some places. Will they converge now that the interbank rate has been empowered to be a true market rate? I don’t think so.

Let us know what you think about all this.

Also read:

The RBZ’s digital gold coins are a good idea but may be undone by just one word – trust

Zim govt no longer forcefully taking 15% of your USD sales, expects US$13 bn forex inflows this year