News / National
Zimbabwe interbank forex market set for overhaul
18 May 2019 at 13:59hrs | Views
A proposal has been tabled to overhaul the interbank market with a view to make it market driven and free from government intervention as part of measures to ensure liberalization of the foreign market and efficient mobilisation and distribution of foreign currency, Business Times reportednt.
This comes as Zimbabwe's business organisations this week convened crunch meetings over the local currency situation as prices continued to skyrocket pitting business and government on a collision course.
The interbank market took to a slow start in February as banks shunned the system.
Activity on the platform is still low as players adopt a wait and see attitude with funding apparently dwindling since inception.
Earlier CZI president Sifelani Jabangwe said the industry requires US$300 million while the interbank has only managed to trade US$85 million. On introduction of the interbank market, the foreign currency backlog had breached US$800 million.
Delta Corporation CE Pearson Gowero is on record yesterday saying at his company's annual results briefing funding appears to be dropping since the market was introduced in February.
The open market interbank platform was introduced to, among other things, efficiently allocate foreign currency in the economy.
Sentiments the interbank system had teething problems became apparent when Reserve Bank of Zimbabwe (RBZ) deputy director for financial markets, money and capital markets William Manhimanzi in March said in the first three weeks of the facility, some banks had not utilized it, forcing the central bank to "recall some of the money" which lay idle.
RBZ governor John Mangudya was to later confirm there was a slow uptake particularly at the platform's infancy.
Mangudya however immediately said banks have since warmed up to the idea, although indications still show little activity in the interbank market forex-trade.
Prevailing challenges with systems point to lack of confidence and independence, with industry opting to go on the parallel market where they get a better deal.
It is such challenges that prompted a technical working group comprising of the RBZ, Office of the President and Cabinet, Ministry of Industry and Commerce, Ministry of Finance and Economic Development, Confederation of Zimbabwe Industries, Industrial Associations of manufacturers of basic commodities, among others, to convene at the Ministry of Industry and Commerce and discuss a wide range of macro-economic issues affected by the interbank market, key to ensuring price stabilization in the economy.
The focus was mainly on the 14 basic commodities, namely, mealie-meal, meat, cooking oil, bread, salt, sugar, among others.
According to insiders, the working group agreed that there is urgent need to come up with a credible way of determining the interbank exchange rate.
At the close of business yesterday the interbank rate stood at 3.4x against black market rates of as much as 5.7x as the new system continues to fail to beat the parallel market.
The parallel market rate had largely remained flat for a while at between 4.8x and 5.0x but it is now moving fast, possibly pointing to the entrance of a big buyer.
The working group suggested for the use of the weighted average as a starting point. This rate will ensure that significant amounts of foreign currency are traded through the interbank market on the basis failure to make this interbank market function freely is increasing the risk of the economy re-dollarizing.
It was also agreed that the RBZ should desist from imposing administrative controls on the operation of the interbank market and should allow the exchange rate to be determined freely by market forces. Once the exchange rate is determined by market forces, this rate should be adopted and applicable to all businesses.
"Government, through RBZ should participate, like any other economic agents on the interbank market, and desist from surrender requirements policy, as this is taking the biggest chunk of the foreign currency. This recommendation was made in view of the fact that, currently, Government has capacity to pay for its foreign currency requirements at the prevailing interbank rate from its tax and non-tax revenue collections, evidenced by the fiscal surpluses recorded since October 2018," said a source who requested not to be named.
Apart from that, the technical committees said government and RBZ should continue tightening of fiscal and monetary policies as way of sucking out liquidity from the economy in a holistic approach. Such stance will assist in dealing with price increases, hence getting rid of policy maker's fears of persistent price hikes as well as ensuring sustainability of the interbank operations.
Furthermore, the need to establish a technical working team made up of RBZ, CZI, Chamber of Mines and Bankers Association of Zimbabwe to review the interbank market and come up with ways to make the foreign exchange interbank market functional was mentioned.
Subsequent to the meeting, CZI convened the first meeting of the technical working team on Tuesday at CZI offices. The meeting was attended by CZI, RBZ, RBZ treasurers, as well as the Chamber of Mines.
The meeting unanimously agreed there is suppressed foreign currency liquidity on the interbank market. Generators of foreign currency are not motivated to trade at the interbank market because of the unattractive rate hence supply is constrained. In effect buyers and sellers of foreign currency are not willing to meet at the interbank market because of the prevailing rates being quoted.
"It was also noted that the Reserve Bank, through its surrender requirements is taking almost 50 percent of the available foreign currency, hence, impacting negatively volumes of foreign currency liquidity available to trade at the interbank market. This leaves the rest of the productive sector of the economy competing for the 50 percent remainder. However, the entire 50 percent remainder is also not trading on the interbank market, as the foreign currency generators need amounts of about 40-45 percent of their foreign currency to meet their import requirements," said an insider who requested not to be named.
Economic analyst Eddie Cross told Business Times that an overhaul of the interbank market is the best way forward to ensure market credibility.
"This is the best way because at the moment the rate is being driven by the informal sector and once there is convergence of the rate that will see more people bringing in resources.
"This move is definitely going to ensure market credibility with less involvement of government on the interbank market," said Cross.
Confederation of Zimbabwe Industries (CZI) president Sifelani Jabangwe said a complete overhaul of the forex interbank system is long overdue.
"We need government to do the complete overhaul of the interbank system so that it can be effective. We have for a long time advocated for the review of the system and there is need for government to leave the rate to float on a willing buyer willing seller basis.
"Private players should just take the lead in the system, only government interference will be to inject more forex if there are shortages," said Jabangwe.
The meetings also come at a time Finance minister Mthuli Ncube has projected the economy to flat-line due to a drought which ravaged most parts of the country and Cyclone Idai which damaged the eastern parts of the country, killing 500 people.
"Because of the impact of the drought; Cyclone Idai and power shortages we are now experiencing in the country, we expect a flat economic growth," Ncube told Parliament yesterday (Wednesday).
This comes as Zimbabwe's business organisations this week convened crunch meetings over the local currency situation as prices continued to skyrocket pitting business and government on a collision course.
The interbank market took to a slow start in February as banks shunned the system.
Activity on the platform is still low as players adopt a wait and see attitude with funding apparently dwindling since inception.
Earlier CZI president Sifelani Jabangwe said the industry requires US$300 million while the interbank has only managed to trade US$85 million. On introduction of the interbank market, the foreign currency backlog had breached US$800 million.
Delta Corporation CE Pearson Gowero is on record yesterday saying at his company's annual results briefing funding appears to be dropping since the market was introduced in February.
The open market interbank platform was introduced to, among other things, efficiently allocate foreign currency in the economy.
Sentiments the interbank system had teething problems became apparent when Reserve Bank of Zimbabwe (RBZ) deputy director for financial markets, money and capital markets William Manhimanzi in March said in the first three weeks of the facility, some banks had not utilized it, forcing the central bank to "recall some of the money" which lay idle.
RBZ governor John Mangudya was to later confirm there was a slow uptake particularly at the platform's infancy.
Mangudya however immediately said banks have since warmed up to the idea, although indications still show little activity in the interbank market forex-trade.
Prevailing challenges with systems point to lack of confidence and independence, with industry opting to go on the parallel market where they get a better deal.
It is such challenges that prompted a technical working group comprising of the RBZ, Office of the President and Cabinet, Ministry of Industry and Commerce, Ministry of Finance and Economic Development, Confederation of Zimbabwe Industries, Industrial Associations of manufacturers of basic commodities, among others, to convene at the Ministry of Industry and Commerce and discuss a wide range of macro-economic issues affected by the interbank market, key to ensuring price stabilization in the economy.
The focus was mainly on the 14 basic commodities, namely, mealie-meal, meat, cooking oil, bread, salt, sugar, among others.
According to insiders, the working group agreed that there is urgent need to come up with a credible way of determining the interbank exchange rate.
At the close of business yesterday the interbank rate stood at 3.4x against black market rates of as much as 5.7x as the new system continues to fail to beat the parallel market.
The parallel market rate had largely remained flat for a while at between 4.8x and 5.0x but it is now moving fast, possibly pointing to the entrance of a big buyer.
The working group suggested for the use of the weighted average as a starting point. This rate will ensure that significant amounts of foreign currency are traded through the interbank market on the basis failure to make this interbank market function freely is increasing the risk of the economy re-dollarizing.
It was also agreed that the RBZ should desist from imposing administrative controls on the operation of the interbank market and should allow the exchange rate to be determined freely by market forces. Once the exchange rate is determined by market forces, this rate should be adopted and applicable to all businesses.
"Government, through RBZ should participate, like any other economic agents on the interbank market, and desist from surrender requirements policy, as this is taking the biggest chunk of the foreign currency. This recommendation was made in view of the fact that, currently, Government has capacity to pay for its foreign currency requirements at the prevailing interbank rate from its tax and non-tax revenue collections, evidenced by the fiscal surpluses recorded since October 2018," said a source who requested not to be named.
Apart from that, the technical committees said government and RBZ should continue tightening of fiscal and monetary policies as way of sucking out liquidity from the economy in a holistic approach. Such stance will assist in dealing with price increases, hence getting rid of policy maker's fears of persistent price hikes as well as ensuring sustainability of the interbank operations.
Furthermore, the need to establish a technical working team made up of RBZ, CZI, Chamber of Mines and Bankers Association of Zimbabwe to review the interbank market and come up with ways to make the foreign exchange interbank market functional was mentioned.
Subsequent to the meeting, CZI convened the first meeting of the technical working team on Tuesday at CZI offices. The meeting was attended by CZI, RBZ, RBZ treasurers, as well as the Chamber of Mines.
The meeting unanimously agreed there is suppressed foreign currency liquidity on the interbank market. Generators of foreign currency are not motivated to trade at the interbank market because of the unattractive rate hence supply is constrained. In effect buyers and sellers of foreign currency are not willing to meet at the interbank market because of the prevailing rates being quoted.
"It was also noted that the Reserve Bank, through its surrender requirements is taking almost 50 percent of the available foreign currency, hence, impacting negatively volumes of foreign currency liquidity available to trade at the interbank market. This leaves the rest of the productive sector of the economy competing for the 50 percent remainder. However, the entire 50 percent remainder is also not trading on the interbank market, as the foreign currency generators need amounts of about 40-45 percent of their foreign currency to meet their import requirements," said an insider who requested not to be named.
Economic analyst Eddie Cross told Business Times that an overhaul of the interbank market is the best way forward to ensure market credibility.
"This is the best way because at the moment the rate is being driven by the informal sector and once there is convergence of the rate that will see more people bringing in resources.
"This move is definitely going to ensure market credibility with less involvement of government on the interbank market," said Cross.
Confederation of Zimbabwe Industries (CZI) president Sifelani Jabangwe said a complete overhaul of the forex interbank system is long overdue.
"We need government to do the complete overhaul of the interbank system so that it can be effective. We have for a long time advocated for the review of the system and there is need for government to leave the rate to float on a willing buyer willing seller basis.
"Private players should just take the lead in the system, only government interference will be to inject more forex if there are shortages," said Jabangwe.
The meetings also come at a time Finance minister Mthuli Ncube has projected the economy to flat-line due to a drought which ravaged most parts of the country and Cyclone Idai which damaged the eastern parts of the country, killing 500 people.
"Because of the impact of the drought; Cyclone Idai and power shortages we are now experiencing in the country, we expect a flat economic growth," Ncube told Parliament yesterday (Wednesday).
Source - businesstimes
