NEW MONETARY POLICY MEASURES

Adoption of Market Determined Exchange Rate System

·      The auction system has been replaced by a refined interbank foreign exchange market under a willing-buyer-willing-seller (WBWS) trading arrangement; and

·      Following this development, a transparent price discovery mechanism is now in place in the interbank market. RBZ will continue to provide trading liquidity to the market using the 25% surrender proceeds from exports.

Efficient and Optimal Money Supply Management

·     The Bank’s money supply management policy thrust will ensure that reserve money growth is contained within the limits of growth in gold and foreign currency reserves; and

·      The Bank will continue to maintain a tight monetary policy stance to ensure sustainability of the monetary anchor. Efficient management of liquidity and money supply will entail the discontinuation of all Quasi-Fiscal Activities, and alignment of interest rates with positive real rates and exchange rate expectations.

Introduction of New Structured Currency

·      The Reserve Bank is introducing a structured currency which is generally defined as a currency that is pegged to a specific exchange rate or currency basket and backed by a bundle of foreign exchange assets (potentially including gold). This means that a Central Bank can only issue domestic notes and coins when fully backed by a foreign “reserve” currency or foreign exchange assets and that the currency is fully convertible into the reserve currency on demand;

·      The structured currency being introduced is anchored by a composite basket of foreign currency and precious metals (mainly gold) held as reserves for this purpose by the Reserve Bank;

·       With effect from 5 April 2024, banks shall convert the current Zimbabwe dollar balances into the new currency which shall be called Zimbabwe Gold (ZiG) to foster simplicity, certainty, and predictability in monetary and financial affairs;

·       The new currency will co-circulate with other foreign currencies in the economy; 

·     The swap rate will be guided by the closing interbank exchange rate and the price of gold as of 5 April 2024. The swap rate shall be used to make legitimate conversions of all ZW$ deposits in the banking sector; all ZW$ loans and advances made by the sector;

·     All ZW$ notes and coins held by account holders will be credited into their ZiG accounts using the applicable conversion factor. The banks will continue to accept these deposits for a period of 21 days after 5 April 2024;

·     The introduction of the new structured currency will naturally require the issuance of new bank notes to facilitate transactions in the economy, whilst maintaining the Bank’s policy of a cash-lite economy;

·      ZiG shall always be anchored and fully backed by a composite basket of reserves comprising foreign currency and precious metals (mainly gold), received by the Reserve Bank as part of in-kind royalties and kept in the vaults of the Bank;

·     Foreign currency balances will be accumulated through market purchases from the 25% surrender requirements as well as sale of some precious metals received as royalties;

·      The starting exchange rate shall be determined by the prevailing closing interbank exchange rate as at 5 April and the London PM Fix price of gold as at 4 April 2024;

·      To ensure the sustainability of the exchange rate system the RBZ will ensure that the quantum of reserve money is fully backed by the equivalent gold and foreign currency reserves. In addition, up to 50% of the liquidated surrender forex receipts will be channelled to support the forex market. The monetary authorities will also foster the demand for the local currency (ZiG) through a mandatory requirement for companies to settle at least 50% of their tax obligations on Quarterly Payments Dates (QPDs) in ZiG;

·     The Bank has recalibrated the Bank policy rate from 130% per annum to 20% per annum consistent with the new monetary policy framework;

·      The statutory reserve requirements for demand deposits in ZiG and savings and time deposits in ZiG remain at 15% and 5%, respectively; and

·     The RBZ expects the structured currency (ZiG) to result in the dissipation of inflationary pressures in the short to medium term. As such, the inflation profile is expected to mirror the current trend of the domestic USD inflation which averaged 5.03% in 2023.

KEY OBSERVATIONS & IMPLICATIONS

·     The upside for the structured currency (ZiG) is that there is a defined mechanism for deliberating on the intrinsic value of the currency as opposed to relying solely on confidence in the monetary system. From a purely theoretic perspective, it should bring forth a sense of stability to the currency.  That said, the MPS does not give full details on the mechanics behind the ZiG. There are some gaps on how the value is derived. Based on the information provided;

1 ZiG is equivalent to 1 milligram of gold (1/1000)

The price of 1 milligram of gold = USD 0.0733

Therefore, USD1 = 1/0.0733 = 13.6 ZiG (Starting Exhange Rate)

Applying the interbank rate of ZWL30,741.75 implies a SWAP rate of ZWL1 = 0.000441851 ZiG

The lack of information on the value attribution of 1 milligram of gold for 1 ZiG presents the risk of being rejected by the transacting public. There is need for aggressive awareness campaigns to educate the public on how this new currency is valued.

·    Different economic shocks have impacted the structure and shape of the Zimbabwean economy. There is clear evidence the Zimbabwean economy is now largely informal given a proliferation of informal businesses meaning that most transactions are in USD and largely cash based. The technical attributes of ZiG as a structured currency also present a significant knowledge gap amongst operators in this informal economy. The big risk is that ZiG may further increase the propensity to transact in US dollars thereby entrenching a USD-cash based informal economy. We envisage a situation whereby ZiG may largely be used for (i) smaller transactions (ii) change and (iii) compliance to statutory obligations like taxes and levies.

·     The willing-buyer-willing-seller trading arrangement for foreign currency is an attempt to boost confidence in the economy. The idea of transparency and a floating exchange rate has long been requested and if fully implemented could combat the currency volatility.

·     There is scope for value destruction amongst holders of large ZWL balances. This is because the realistic/practical value of the ZIG will ultimately depend on how it will be accepted by the general population and the economy at large. There is still a lot of uncertainty on the economic fortunes of Zimbabwe, particularly in the year 2024. Price discovery will also take time.

·       The structured currency (ZiG) does not address the underlying economic fundamentals and critical issues such as (i) policy inconsistencies, (ii) the debt overhang, (iii) corruption, (iv) international isolation and (v) productivity headwinds. These issues present significant limitations on the quest to achieve macro-economic stability.

·      The success of ZiG will depend on the broader confidence of economic agents. The idea of linking a currency to a basket of underlying assets (gold) provides a method of determining the intrinsic value of a currency. However, there the waning confidence in the banking system in Zimbabwe presents significant headwinds for the RBZ. We contend that there is need for an independent technical partner/auditor in the implementation of such monetary systems given the low levels of public trust. It is also our view that the institutional design of the Reserve Bank of Zimbabwe (RBZ) hinders monetary policy effectiveness, and we identify the following critical issues;

Political Independence and Central Bank Autonomy – It is very critical for the RBZ to demonstrated that it is independent from political control. This is an important way to reassure the public about the Bank’s credibility. Moreover, the degree of autonomy delegated to the Central Bank affects the design of the structure of the governing bodies and the accountability provisions.

Credibility of Monetary Policy.  Credibility also refers to the degree of confidence that the public has in the central bank’s determination and ability to meet its announced objectives. Policy changes and inconsistences have a negative impact on the RBZ’s credibility as an institution. In addition, a credible monetary policy should be implemented by an independent central bank through a rule which bounds the monetary authority’s actions, avoiding the time-inconsistency problem.

Time Consistent Policies. A time consistent policy is one where a future policymaker lacks the opportunity or the incentive to default. The fundamental insight regarding the notion of time-inconsistency and credibility, presented by Kydland and Prescott (1977), is that when economic agents are forward-looking, the policy problem emerges as a dynamic game between the government and the private sector – where the government is the dominant player, and the private sector is the follower. The New Classical approach argues that since the monetary authority has no precommitment with an announced policy and usually makes use of its discretionary powers, it will have an incentive to cheat, making the announced policy time-inconsistent and then non-credible.

Consequences for Bad Inflation Outcomes – There is need to introduce laws so that Central Bankers or monetary authorities in Zimbabwe take responsibility and are accountable when inflation targets are not met. This will help make the public believe that they will commit to a low inflation rate. Most Modern Central Banks have legally imposed inflation targets. For example, the Governor of the Bank of England must write a letter to the Chancellor explaining why targets are not met.

Forward Guidance & Effective Communication- Monetary authorities in Zimbabwe should consistently communicate and update the public on all important developments to the public. There is need to provide consistent forward guidance on major changes such as the introduction of a new currency, including the desired and expected path of interest rates, exchange rates and inflation.

Overall, we think the confidence deficit amongst key economic players in Zimbabwe limit any efforts by the RBZ to successfully foster macro-economic stability.

STRATEGY RECOMMENDATIONS

·    Investors should diversify portfolios by exploring USD-denominated alternatives investments and offshore opportunities.  An important highlight is that pre-requisite conditions that support a domestic currency such as (ii) fiscal consolidation (eradication of budget deficits and national debt); (ii) stable current account surplus; and (iii) adequate foreign currency reserves have not been met. The general population still regard monetary amounts not in terms of the local currency but in terms of a more stable foreign currency (USD). There is also evidence that most prices are being quoted in US dollars while most households and individuals prefer to keep wealth in non-monetary assets (real estate and commodities) or in a relatively stable foreign currency (USD dollars). Investors should focus on value preservation and target assets such as (i) International Real Estate, (ii) Projects (Renewable Energy), (iii) Things (Art and Gold) and (iv) Private Equity/Structured Instruments.

·     Investors should adopt a selective investment approach in 2024. The list of headwinds facing the economy include elevated policy uncertainty and restrictive monetary policy. Given this backdrop, a selective strategy that involves investing in defensive sectors such as Consumer, Food & Agriculture and Financial Services Sectors is recommended.