SI142: A SWOT Analysis

A new dawn or more of the same? Many were left a little perplexed by the surprise announcement of Statutory Instrument 142 of 2019 which re-introduced the Zimbabwean Dollar. In this article, we shall 'balance' you.

 Strengths
  • The forbidding of the use of foreign currencies has had the effect of forcing those who make purchases in US dollars to convert them to Zim Dollars first before making a transaction. The result is a simultaneous increase in the supply of USD on the formal and informal markets and a near-elimination of its demand for transactional purposes.
  • Inflation is somewhat tamed as the increase in interest rates from 15% to 50% per annum means more money will be kept in the banks as savings now earn over 3 times the previous rate of return and speculative borrowing will be greatly reduced since borrowing at 50% for high-risk activities is not financially smart.
  • Since interest rates have gone up, the supply of loanable funds will increase. Banks will now have more capital to loan to businesses. 
  • The relaxation of restrictions on the bureaux de change and removal of margin caps for banks on the interbank market will lead to increased activity on the formal exchange markets and less activity on the parallel market where individuals and companies found themselves paying very high premiums of about 50% to obtain foreign currency.
  • The commitment by the RBZ to sell at least 50% of the export proceeds surrendered to it by exporters on the interbank market will increase the supply of US dollars to the interbank market thus placing downward pressure on the rate.

Weaknesses
  •  The banning of the multi-currency regime has eliminated price stability – This was a key benefit of the dollarisation era. Since prices are no longer displayed in US dollars yet businesses had become accustomed to the controversial method of pricing according to the parallel market rates, we can expect to see prices changing on a daily basis until the exchange rate stabilizes.
  • The tax brackets are to this day, still based on the 1:1 era yet incomes are not. This means that if you were earning US$500 per month before the abandonment of the 1:1 parity and continued to earn US$500 after that, ZIMRA will consider your income to have multiplied by the prevailing interbank rate and will thus tax you in the respective tax bracket for such incomes. For example, if the interbank rate today is 8, a person earning US$500 today will be taxed as if they were earning US$4 000 during the 1:1 era.
  • The assumption of the ZWL 1.2 Billion RBZ debt to banks by the government will strain the fiscus as the taxpayer now has to be pick up the bill for the central bank’s actions. It is also worth noting that the assumption of debt by the taxpayer requires parliamentary approval.
  • The hasty and unexpected abolishment of the multi-currency era in the absence of wide-ranging consultations with various representative bodies has done little to inspire much-needed confidence in the Reserve Bank. In lieu of the fact that SI142 is the most significant policy announcement in Zimbabwe since the introduction of the multi-currency regime in 2009, one would expect the apex bank to have given the nation and other key stakeholders some heads up.
  • Some inconsistencies exist such as the requirements for duty of vehicles and airline tickets to be sold in foreign currency raise suspicions that the interbank is still not giving a true depiction of the value of the Zimbabwe Dollar. When a government refuses to accept its own currency, it a sign that all may not be well.

Opportunities
  •  As outlined in our previous article on Dollarization (here), the abandonment of the multi-currency system is an opportunity for the authorities to prove to the nation that they can exercise true fiscal and monetary discipline. De-Dollarization will only be successful if there is strict adherence to these virtues or we will soon re-dollarize.
  • The missing tool of our monetary policy has been fully restored – control of money supply. This presents the RBZ with the opportunity to use this as a method to increase production by influencing the exchange rate to keep the nation’s exports competitive.

Threats
  •  The printing press can now be fully turned on. The tool that eroded the incomes of millions and brought the former breadbasket of Southern Africa to a grinding halt via hyperinflation is now back and here to stay for the foreseeable future. If this notoriously imprudent government resorts to default settings and chooses to print money whenever it is broke – we may be in for a very long and painful ride.
  • Significant disequilibria exist in 2 foreign currency dependent markets; namely fuel and electricity – both are imports. The prices Zimbabweans pay for these 2 products are not cost-reflective. Fuel should be roughly double its current price and electricity should be about 8 times its current price. Government is, therefore, subsidizing these two products but because the government is broke, it is unsurprising that we see serious shortages of both. Therefore, at some point in the future, the economy will be hit by waves of inflation emanating from the upward adjustment of these prices as the status quo is simply unsustainable.
  • Civil servants are demanding significant salary increases and while the government has been reluctant to acquiesce due to budgetary constraints, the purchasing power of the government worker has been so significantly eroded that it is inevitable that this increase will come, and it will most likely be inflationary.


Summary of Exchange Rate Implications:

The parallel market rates have temporarily retreated. However, since the appreciation of the Zimbabwe dollar appears to be driven more by the legal factor of it being the nation's sole legal tender for transactions and not as much by the economic factors of foreign exchange demand and supply, we expect a gradual rise in over the medium to long term. The good news is that the days of large surges in the rate should now be over.

Legal Issues:

- SI142 may be invalid as the Minister of Finance does not have the power to amend an Act of Parliament.
- SI142 does not ban the use of foreign currency. 'Sole legal tender' means that if a buyer wants to pay in Zimbabwe dollars, the seller must accept them. However, if the buyer and the seller agree to settle the transaction in US dollars, that is perfectly fine.
- S1142 does not create any criminal offenses and there is no law which currently exists that bans the use of foreign currencies.

Miscellaneous:
  • Individuals may continue to withdraw up to US$1000 per day from their Nostro FCA accounts.
  • Diaspora remittances will continue to be received in foreign currency cash although receivers do have the option to deposit into a Nostro FCA or convert to Zimbabwe dollars on the interbank market.


Twitter: @RocksBalancing










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