Statutory Instrument SI142 of 2019 abolished Multicurrency – will it work

With the full cocktail of measures unveiled by the RBZ and the MoF now public knowledge, the question on everyone’s lips is “Where to?” Or put differently, “Will it work?” What I can say is that the full cocktail of measures was something that we as Industry and Commerce recommended, but with a few twists. We had confidence that it would work, and I am still of the same opinion, despite the twists.

The first and biggest twist of course was the abolishment of the multi-currency system, something we actually advised against, especially right at the onset of the reforms. The reason for this was simple: it would cause unnecessary panic and flight from nostro accounts. So far we seem to have been proved right. There is indeed panic withdrawals and speculation that nostros will be raided once again. I know this will not happen, but tell that to those who have been thrice burned!

Judging by how businesses have responded so far, however, it actually now looks like it was a master stroke! Why do I say this? Most businesses I have seen have stopped charging in US dollar, and are now charging in Zimbabwe dollar. So that forces those who were now using USD to transact locally to change their money into ZWD and of course that reverses the demand direction, which will dampen the exchange rate. The temporary downside is most such retailers hiked their RTGS price, but that is something that will soon be corrected by the lack of RTGS liquidity in the first instance, but more so as the interbank market becomes functional and efficient – if it does become that.

The second twist was the directive by RBZ that all funds for legacy debt be transferred to the Central Bank, a move expected to mop up ZW$1.2 billion out of the banks. This, coupled with the hike in interest rates, will create a ZWD shortage which again will serve to bolster the rate. So again this was a positive variance from our initial proposal, and will serve to tighten liquidity and prevent the banks from lending out to people who will use the money to buy currency.

Where the MoF missed it was in not declaring that ALL taxes be paid in local currency, using the interbank rate. This move would have created an even greater pull for liquidation of export proceeds, as most exporters are also big importers. Given that banks are now unable to lend to them, their only option would have been selling their foreign currency in order to fund their local obligations. This half-hearted move by the MoF also sends a negative signal in terms of their confidence in the interbank market.

All in all the cocktail of measures was meant to achieve three things: (1) dampen demand for USD within the economy, (2) increase demand for ZWD within the economy, and (3) ensure the interbank market is functional and efficient. Steps one and two are done. It remains to be seen if step 3 will be implemented faithfully. If step (3) is done, then certainly we can expect to see the ZWD sustainably appreciating in the next few weeks. The good thing about any appreciation of the ZWD is it will result in speculators and hedgers selling USD, especially those who borrowed local currency to buy the USD. This will of course accelerate the appreciation even more.

In the short term, though (perhaps next two to three weeks) we may see some resistance towards a downward movement of the rate purely because of the confusion caused by the sudden abandonment of the multi-currency regime. As the dust settles, however, we should see the ZWD appreciating markedly against the USD in the medium to long term, all other things being equal.

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