Beyond the jargon, there is a disconnect between the letter from the Ministry, and the spirit at RBZ

By Colls Ndlovu

 

From today’s much anticipated press conference in Harare, one gets the impression that Prof Mthuli Ncube wants to get things back to normal in Zimbabwe’s financial system, but the odds are staked against our honourable professor.

He has rightly announced a whole raft of changes that are fulcrumed around the Reuters trading system. Two questions arise:

(i) How reflective of the actual market rates will the foreign exchange rates coming out of the Reuters system? From the statement we are told that the RBZ will set up its own Reuters platform where it will monitor and “intervene” where needs be.

So here lies the gogga.

The intervention of the RBZ will merely distort the market and force things back to distorted exchange rates thereby nicodemously recreating the black market ( people will return To the black market).

By way of an example, the RBZ currently believes that the US$ to the Zim $ exchange rate is 1 to 18. Yet market forces put it at 1 to 40. So invariably the RBZ will intervene to distort the market by artificially forcing the exchange rate to 1:18 ( this will happen but amid an illiquid and forsaken market with no players (when all players would have gone back to their trusted black market).

Reuters System

(ii) The Reuters system is merely a platform. It’s more like moving currency traders from Samora Machel Avenue to Nelson Mandela Avenue. The presence of the RBZ “monitoring” and “intervening” (these words are very dangerous to the markets) is a tongue in cheek statement by the RBZ saying nothing has changed. The market won’t be free as we are here and ready to intervene.

So the words “intervening” and “monitoring” are scarecrows to the markets. The question is: how will the RBZ intervene? What if it intervenes by criminalising currency traders and expropriating their money by accusing them of illicit trades?

These and related questions are what the market is asking itself. How to mitigate this risk, market players then either trade in very limited quantities or stop trading altogether there by causing illiquidity.

The RBZ has no significant foreign exchange reserves so even the words intervene are meaningless because it can’t intervene to influence the market in any significant way other than resorting to the mischief of seizing people’s funds on spurious and frivolous grounds and accusations of impropriety

The spirit in the document is missing

What is critical however is the spirit of the document. That’s where we are saying the spirit seems to be missing. That is the big question. The spirit is missing from the RBZ.

As for Bureau de changes, most of them won’t have any liquidity at all as the statement requires them to maintain a daily US$20 000. The question is: where will they get this float from ?

So the letter of what the government seeks to do is good. But the spirit is not up to speed as the main currency distorting agent (the RBZ) has managed to position itself in such a way that it will gerrymander the whole thing back to where it was.

South Africa had US$55 billion worth of foreign. Exchange reserves in its kit, but, even this is not enough to influence the market. Zim has zero foreign exchange reserves yet it’s central bank says it will “intervene”. Intervene and do what exactly?

Intervene, for what exactly, when you have no forex reserves

So my two cents worth of advice to anyone who cares to hear my opinion: forget about all these buzz words and the jargon. Just watch the RBZ. The RBZ is the devil we all know. It follows the money.

So it’s intervention (with what we don’t know because it has no Forex reserves) will simply distort the Reuters exchange rate and reduce it to the artificial one which is shunned by banks and other market players right now at the interbank level.

So the Reuters trading platform is merely a disguised version of the current interbank trading platform.
Now, the question which arises then is: What should the statement have said exactly ?

The statement should have said with immediate effect, the foreign exchange market will be liberalised and freed to operate on pure free market principles without any intervention from the central bank whatsoever. The Reuters trading system should have simply been introduced as a platform to ensure this happens and to make it easy for market players to trade.

Just to help our folks with the mechanics of central bank intervention in the Forex market:

(i) Let’s say the RBZ has US$10 billion in its kit ( unfortunately it has zero) then the central bank can say it will intervene to try and influence the Forex market in favour of the Zim$. How will it do so? It can flood the market with US$s thereby making the value of the Zim$ stronger relative to the US$ (e.g. making it gain from 1:18 to 1 to 15).

But here is the catch: in the case of Zim ( and assuming the presence of US$10 billion), the markets know that the central bank can intervene up to US$10 billion. And thereafter what happens?

It becomes a one-way bet because the market knows that beyond US$10 billion the RBZ won’t have any capacity. The markets can then take the Zim$ to the wires knowing fully well that the RBZ’s capacity has been exhausted.

Japan tried, and couldn’t do it

Japan famously spent US$60 billion trying in futility to intervene in its foreign exchange market during the Asian financial markets crisis in 1999.

Yes but how then can a central bank intervene in the markets?

A central bank can only successfully intervene to influence the internal value of its currency through raising or reducing its interest rates. It can weaken the internal value of its currency through money supply or strengthen it by draining liquidity off the system (what the document refers to as “mopping off excess liquidity”).

Interest rates can be raised or reduced but they also have technical limitations. For example you can reduce them to zero% then what?

In Zim interest rates are worse than useless because there is no active market in lending or borrowing.
This document is the letter of what the government seeks to do. Which is good.

The word “managed” shows the RBZ rearing it’s ugly head and its “visible” toxic hand.

So in conclusion: from the statement, one can conclude that the politicians (read Zimbabwe Ministry of Finance) want things to work, but the professionals (read RBZ) is just not interested and wants to continue on the downward spiral path.

So the Zimbabwe economy faces a strange paradoxical conundrum where politicians genuinely want things to work out for their country while professionals are just not interested and are prepared to use every quadratic equation in the book to thwart the government’s valiant effort.

 

Ndlovu, an award-winning central banker, formerly with the South African Reserve Bank and previously attached to the International Monetary Fund Institute, in Washington DC, where he completed an advanced programme in specialised financial institutions and derivative financial instruments in 2005. He writes in his personal capacity. This article was published in the Zimbabwe Independent.

 

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