Bond note, RTGS model didn't fail, says Mangudya

Following the announcement of the Monetary Policy Statement (MPS) by Reserve Bank of Zimbabwe governor John Mangudya (JM) this week that effectively liberalised the exchange rate between the US dollar and the local quasi-currencies, the Zimbabwe Independent Senior reporter Tinashe Kairiza (TK) spoke to the central bank chief on how the just introduced interbank foreign exchange market will work and be managed. Below are excerpts:

TK: During announcement of the Monetary Policy Statement (MPS) this week, you announced some bold reforms towards liberalising the exchange rate, which entails setting-up an interbank forex trading platform. How exactly is this system going to work?

JM: It is very simple. What we have done is that we have created an inter-banking market platform for foreign currency in Zimbabwe. The whole idea is to ensure that we formalise the selling and buying of foreign currency through formal channels, which are basically your banks and bureaux de change, which is in line with international best practice, as opposed to people exchanging their money on the parallel market. We did this precisely for three reasons. The first one is to ensure that we stabilise prices in Zimbabwe. If we allow prices to be determined by parallel market exchange rates, which are not known by anyone, it will be chaos. What is going to happen now is that there will be more buyers and sellers because there is no risk premium. There is a risk premium in the parallel exchange rate determination. There is an imputed risk factor, as well as a scarcity factor. If we open up the foreign currency market, you expect stability in the pricing system. If the rates of exchange are publicised every day in the newspaper, it means that Zimbabweans will know the value of their real money.
Secondly, we also wanted to deal with stabilising the exchange rate. As I said, the rate has taken into account the arising premiums. Exporters, who are the geese that lay the golden eggs, were now finding it difficult to export and to be competitive in an environment of higher inflation when the parallel exchange rate had gone up. Why? By liquidating a certain portion of an exporter's foreign currency at 1:1 it means through that portion we have liquidated you buy less goods in Zimbabwe because it does not have similar value it had before, that is why exporters were now asking for higher retentions, including tobacco farmers. They wanted higher retentions so that they could preserve the value of their money.

TK: You also said the RBZ will put in place a mechanism to manage the inter-bank platform. How exactly is the central bank going to be monitoring and managing the platform to determine the prevailing rate on a particular day?

JM: All banks in this country have traders and treasuries and the RBZ has similar systems which link it to the banks through the routers system, whereby the dealers make the request for foreign currency from the banks' clients. So (say) a client walks into the bank, and he wants to pay school fees. In that case we will ask for old invoices. The banks will give you a rate, for example $1 000 and we will allow them to have a margin. Then we will debit your RTGS account or foreign currency account. After the end of the day, the banks will collate all this information on a two-hourly basis for a start and they need to report to us on how the market is behaving, relating to their sales and purchases of foreign currency. When they tell us, we see exactly how the market is behaving. We do not want banks to be the ones determining the rates. We are doing this in good faith.

TK: During presentation of the MPS, you highlighted that the central bank had secured lines of credit to support the new foreign currency trading platform and the liberalisation of the exchange rate. How much have you secured and from where?

JM: I do not want to say the sources of our funding for a starter because I know that this market is not as kind as it is. Sometimes I have to keep such information in my bosom. But what I can tell you is that we have put in place some foreign currency reserve to ensure that this system starts on a clean and safe path by putting in place lines of credit to support the interbank platform. In terms of amounts, let me just say it is substantial.

TK: How substantial? Give an indication of how much is involved.

JM: What I can assure you is that the line of credit is there. The lines of credit for letters of credit (LCs) are also there.
TK: At inception, the bond note was supported by various Afreximbank facilities in excess of US$300 million. However, the local unit was gradually losing value against the US dollar. What eroded the value of those support facilities?

JM: That is not true. What happened is that the fundamentals of the economy were changing significantly in October. Let us just call a spade a spade. The parallel exchange rate in June was at a premium of $1 200 to $1 800 during the year 2018 up to September. Therefore, the bond did not lose much ground at that rate. Fast forward to October, the fundamentals changed, inflation went up by 5%. All these incentives were higher than inflation, so it means it was a real incentive. Inflation went up to 20% in October, now 42%. It is not the bond note which has lost value; it is inflation which has gone up. We can no longer sustain that anymore. We now want to fix the inflation. Fix the rate. Stabilise the exchange rate.

TK: Just two weeks ago, the central bank dismissed rumours that you were going to announce the return of the Zimbabwean dollar. In your MPS you said existing electronic balances, bond notes and coins would evolve into what you called RTGS dollars. Is this not a way of introducing the local currency through the back door?

JM: This is an interesting question. We have not introduced the local currency, for goodness' sake. All we have done is to call what we are trading in by their actual names. All we have said is that let us denominate what we shall call RTGS balances as RTGS dollars. We have said let us put them in a group. We have grouped RTGS balances, bank notes and coins in their own group called the RTGS dollars for the sake of people to exchange. In the basket of currencies where you have the US dollar, renminbi and the rand, you now have the RTGS dollars, so that they can now talk together. Right now it was difficult to exchange.

TK: Governor, for a very long time the central bank was insisting that the local unit was trading at par with the US dollar. The MPS has just abandoned that position. How have circumstances changed now to explain that shift?

JM: Circumstances changed in October last year. You are aware that the economy was growing, let us be fair, as a result of the high expansionary fiscal policy of government. The economy has been expanding on the back of an expansionary fiscal policy. If government was not spending money the way it did, this economy would not have grown. You need to ask yourself how did Delta manage to sell more beer, how did OK manage to sell more groceries to people, how did Nestlé expand their business? What was the source of that money? The source of that money was from government and ended up in business' hands. As a result of government's expansionary fiscal policy, it also took the country out of deflation in February 2016. It was more about quantitative easing. This happens in Europe. When we do it here, people say there is something wrong.

TK: What is the new approach now?

JM: We now want to stabilise the economy. We are now slowing down. We have grown. We need to liberalise the economy. Let us put these measures in place which are sustainable. We are by ourselves; we need to increase social cohesion. We need to mark areas where we are talking the same language. Let us not use the economy as a battle ground. As RBZ we want to play our small part because Zimbabweans deserve better. We need to increase production in this country.

TK: Let us talk about the tenure of your predecessor, former governor Gideon Gono. He also experimented with liberalising the exchange rate and the consequences were quite catastrophic. A decade later, you are doing the same. Should we expect a different outcome?

JM: Let me be very blunt. We can never compare today and 2008. The economic fundamentals are so different. You are saying right now companies are producing and they are exporting. An estimated US$6,2 billion was earned in 2018. If you go back to 2008, there was no forex to talk about. We were buying bread from South Africa. There was nothing. So, yes, RBZ liberalised. What happened in 2008 and now is very different.

TK: One of the salient features of the MPS was the liberalisation of the exchange rate, perhaps informed by market trends. Would you say that move is an admission the bond
has failed catastrophically?

JM: The bond note did not fail. RTGS did not fail. We only have $474 million of bond notes in circulation out of $10 billion RTGS deposits. How can a fraction of $474 million of bond notes fail the economy? I do not want to talk about politics. I am an economist. It defies economic reasoning and rationale. We should never put politics into economics. The bond note is only monetising the incentive. The best thing is to ask exporters, ask tobacco farmers and gold producers. Have they not benefitted? The bond note has not failed. About $4 billion of that are loans to the private sector, and about $3,2 billion are in savings deposits so it means you have $7,2 billion. Then $1,8 billion, those are now the RTGS balances and Treasury Bills (TBs) sitting on the banks. It means there is a major difference between now and 2008.

TK: Which productive sectors of the economy are being allocated the bulk of the allocations? And how much is the committee allocating on a monthly basis?

JM: Fuel procurement is now being allocated between US$80 million and US$100 million for the procurement of 120 million litres every month. If you look at cooking oil, we are looking at US$10 million and US$15 million every month. Wheat, you are looking at US$15 million. That is why we are insisting on producing locally to save the limited foreign currency.

TK: Many companies have expressed worry around challenges associated with repatriating dividends to foreign shareholders and servicing foreign loans. How is the RBZ addressing this challenge?

JM: We have now addressed it this way: when we open up the economy we attract more foreign currency into the economy. I said in the MPS, we need to sit down with them and
look at the pathways of releasing their moneys. If you look at the legacy dividends, they should now come to the Exchange Control and register it so that we can see the amount of money that is outstanding and we find avenues of sending their money.

TK: We have heard about policy differences between yourself and Finance minister Mthuli Ncube, What is the nature of your relationship with the minister?

JM: I always thought my relationship with the minister is cordial. I only read about that rift in the newspapers.