Policy loopholes drive Forex out of the formal market


An estimated US$2.5 billion is circulating outside the formal banking system in Zimbabwe, with households, businesses and foreign investors preferring to store their hard-earned foreign currency close to their pockets. In a favorable political environment, the millions of people who exchange hands outside of formal banking channels would help fuel the local credit market, reduce foreign exchange problems in the economy, contribute to banking sector revenues, revenue taxes and bring economic stability. However, persistent policy mistakes continue to drive foreign currencies out of the formal economy.

By Victor Bhoroma

The Zimbabwean government’s continued reluctance to institute a market-based foreign exchange system means that the US dollar remains a priced commodity to store value, hedge against inflation in the national currency and trade in the economy. . The disparity between the market exchange rate for foreign currencies and the manipulated auction or interbank rate tells a story of denial and its consequences for ordinary citizens and businesses. Currently, there are varying prices for currencies with the auction rate set at US$1: ZW$416.3 while the interbank rate is set at ZW$429.3. On the open market, the rate accelerated to more than ZW$820 for e-money and ZW$600 for cash (Zimbabwean dollar). Mobile money and foreign currency accounts (FCA) payments also result in different exchange rates on quotes.

Export retention

The current export retention regime allows exporters to retain 60% of export earnings and return 40% to the central bank. If the 60% is not used within 4 months, the central bank will confiscate an additional 25% to bring the total redemption requirement to 65%. On local currency sales, the bank retains 20% of all sales deposited with local banks. Normally, these measures would not be a problem if the exchange rate were determined by the market.

With the above gap between the formal exchange rate and the market rate, exporters lose 35% of their real earnings due to returned earnings. In other words, for every dollar exported, at least $0.35 is lost due to exchange rate disparities. With major (minor) exporters paying taxes and electricity in foreign currency, foreign exchange regulations are a punitive tax for business viability. In view of the above, the minors request the revision of the retention threshold to 80%.

A closer look at neighboring Zimbabwe shows in South Africa and Namibia, export proceeds must be repatriated within 6 months and exporters must sell 100% of their foreign exchange earnings to a bank or authorized dealer within 30 days of receipt of receipts or retain export receipts indefinitely in a foreign currency account. In Mozambique, export earnings must be repatriated within 90 days from the date of shipment and 30% of such export earnings must be converted into Metical. However, exporters can keep 100% of their earnings in a local foreign currency account. In Zambia and Botswana, there are no exchange controls. The common characteristic of all these countries is that the exchange rate is determined by the market (and not manipulated by their central banks) and that they do not face serious shortages of foreign exchange in the formal market.

Local FCA deposits

For businesses that deposit their sales proceeds into local Foreign Currency Accounts (FCAs), the central bank converts 20% of the deposit into local currency and a 4% Intermediate Money Transfers (IMT) tax. applies to all payments made from this FCA account. This means that for every US dollar deposited, 0.10 US dollar is lost due to the faulty exchange policy. As a result of the above, large businesses are finding ways to transact in cash and avoid punitive taxes by not collecting all sales proceeds, while most small businesses and informal traders do not do not cash in their products. Despite this, US dollar deposits with local banking institutions increased from US$570 million in December 2017 to over US$2.2 billion in June 2021 due to growth in export revenues and the need to preserve value.

Endless money printing

Much of the money supply growth emanates from quasi-fiscal central bank operations, export retention credits (creation of virtual currency), and other off-budget financing programs that have the effect of creating an artificial demand for money. foreign currency. As export earnings continue to soar, the central bank must print more money to credit exporters for the 65% of retained export profits. According to the latest figures released by the Zimbabwe National Statistics Agency (Zimstat), between January and April 2022, export earnings amounted to US$2.13 billion, a 39% increase over US$1.53 billion recorded at the same period in 2021. This means that from the retained average export product of US$265 million per month, the central bank must print Zimbabwean dollars (e-money) worth at least US$150 million each month. Auction allocations (average US$110 million per month and over 3 months backlog) can be settled from balance and 20% withheld on FCA deposits.

These rough estimates partly explain why the local currency is in free fall and the demand for foreign currencies remains astronomical. The increase in the domestic money supply does not match the growth in economic output. Each economic agent quickly converts its excess local currency into foreign currency to limit losses and avoid overnight policy changes. The central bank is heavily indebted with key lenders such as Afreximbank owing billions to be repaid every month. To add to the high demand for foreign currency, overseas government bonds also need foreign currency, hence the central bank needs more cheap foreign currency than ever before.

Rising Forex Earnings

In 2021, Zimbabwe earned a total of US$9.7 billion (from US$6.3 billion in 2021) in foreign exchange, with export earnings increasing by 66.6% to US$6.2 billion. US dollars and diaspora remittances increasing by 42.7% to US$1.430 billion. The main contributors to the growth in export earnings are the surge in gold production (from 19 tons in 2020 to 29.6 tons in 2021), the increase in the prices of mining raw materials on the world market and the value added export of enriched PGM metals. Gold production in 2022 is expected to reach 40 tons. Despite year-on-year growth in foreign exchange earnings since 2009, the country is stuck in man-made foreign exchange shortages. Thus, Zimbabwe does not have a foreign exchange problem, but it does have a foreign exchange allocation problem which is solely based on the central bank (government) foreign exchange regulations and policies. The pressure on foreign currencies is caused by an unprecedented depreciation of the local currency (which emanates from money printing), a manipulated exchange system and the dollarization of the economy.

Need for reforms

To ensure monetary stability, the central bank must end all quasi-fiscal operations that will allow it to freeze money printing and institute a market-determined exchange rate by allowing commercial banks to operate the exchange system. ‘auction. Alternatively, commercial banks should be allowed to adjust the exchange rate according to supply and demand mechanisms. Regarding constitutionalism, the central bank should not be allowed to incur foreign debt without the approval of Parliament, as this leads to conflict over how to settle the debt while allowing the exchange rate to be determined by the market. However, lasting stability can only be guaranteed by giving the central bank independence from the government in terms of money printing. History has proven that the government does not hesitate to print money to finance its expenditures and achieve political objectives at the expense of the economy or the taxpayer (citizens and businesses).

Zimbabwe has not had a coherent currency or a coherent exchange rate policy for several decades. Quasi-fiscal operations by the nation’s central bank and deficit financing by the tax authorities have necessitated astronomical levels of money printing at any cost to the nation. The economy collapsed in 1999-2000, 2006-2008 and 2019-2020 due to hyperinflation. The country has entered a new phase of hyperinflation with monthly inflation suspected at over 50% by market analysts.

At the heart of the problem is the government’s desire to control central bank monetary policy and print money whenever tax revenue falls short of targeted government spending. Between 2015 and 2021, the country has enacted hundreds of regulations (temporary measures) aligned with monetary policy and produced a plethora of exchange control regulations or declarations. Some regulatory texts contradicted each other while others died out just before parliamentary ratification. Monetary policy coherence is a fundamental piece of the puzzle of economic stability, without which the country will not develop, no matter what the color of the economic plans. The preference for trading in hard currency and cash indicates the lack of faith in misguided central bank policies over the years.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Comments: email [email protected] or Twitter @VictorBhoroma1.


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