New currency for Zimbabwe as foreign currency crisis deepens

Reserve Bank of Zimbabwe (RBZ) governor John Mangudya has introduced a new local currency - “RTGS dollars” - as the country's severe foreign currency crisis persists.

The announcement was made on Wednesday. Mangudya also announced that the country had ditched the 1:1 ratio between Zimbabwe bond notes and US dollars, a rate maintained by the central bank for nearly three years.

Mangudya, who presented the monetary statement after several weeks of delay, also opened up an interbank system where the RTGS dollars would be traded for foreign currency by local banks on “a willing buyer and willing seller basis".

“We say that the RTGS dollars are composed of RTGS balances, bond note and bond coins and are in the basket of currencies which Zimbabweans are using,” Mangudya told the media.

RTGS stands for "real-time gross settlement" and is the electronic balance in local bank accounts. Last year, the bank ordered the separation of local bank accounts from the nostro accounts that have US dollars.

The central bank chief was non-committal on the exact exchange rate to be used between the US dollars and the RTGS dollars.

Instead, he indicated that the market “would determine” the relative value of the two currencies.

Mangudya said depositors could use their RTGS dollars to buy foreign currency from the banks, a move presumably aimed at choking the lifeblood of the black market, which had become the source of buying the scarce US dollars. It is also meant to avail hard currency to forex-starved companies that have been struggling to import raw materials.

About 100 companies have closed in the 15 months that President Emmerson Mnangagwa has been in office. Many of these were too starved of forex to continue operating, according to a tally from the master of the high court in Harare seen by Sunday Times.

Since November 2016, the rate between the US dollar and the bond note was 1:1, but that value was eroded on the black market by more than four times. Ahead of the monetary policy statement on Tuesday, the US dollar and bond note were trading at 1:4 on the black market.

Economists expected “short-term instability”, which they said was inevitable as a result of the market trying to find a rate.

Ashok Chakravati, an economist in Harare, said the monetary policy was a “courageous move” by the central bank. “It’s a request that has been in the works for many months by companies. It is a sign that this is a listening government and also a listening central bank,” he said.

Ahead of the monetary policy statement there was speculation that a new currency would be introduced.

Neville Mandimika from Rand Merchant Bank said the introduction of a local currency was not a bad thing and in fact was needed.

“The critical issue here is on how it's introduced. There are various steps that must be followed to ensure that the currency will be accepted as a store of value. Of these, the most important is ensuring that the economy has adequate forex reserves, which will act as a shock absorber. At this stage, the reserves simply aren’t there to justify its reintroduction,” said Mandimika in an e-mail.

Zimbabwe's major business associations have been pressing the government either for a local currency to be introduced or for the SA rand to be adopted as a unit of trade.

Some of the other highlights of the monetary policy statement include:

• effective 25 February, depositors will be able to move US dollars locally between banks under the interbank system;
• essential imports such as fuel and electricity will continue to have forex allocated by the Forex Allocation Committee;
• gold producers will keep 55% of their earnings in foreign currency;
• tobacco and cotton growers will receive 30% of their earnings from crop sales in foreign currency. Tobacco merchants will have 80% of their earnings in foreign currency;
• All forex holdings will be liquidated within 30 days at the market rate for the day; and
• a legal instrument will be gazetted that allows for the use of RTGS dollars and all entities, including government and individuals, will recognise the new currency.