Zimbabwe: Government's Forex Measures Dampen Investor Confidence

New foreign currency regulations by the Reserve Bank of Zimbabwe (RBZ) that will restrict employees from receiving their salaries in hard currency -- among a raft of other new changes -- will further weaken investor confidence amid policy inconsistencies in an economy teetering on the brink of collapse.

The move immediately evoked memories of 2008, when the then RBZ governor Gideon Gono raided nostro accounts held by private businesses as the southern African country battled to mobilise foreign currency required to import critical commodities such as fuel and grain. Back then, businesses hurriedly spirited their foreign currency from Zimbabwe.

A leaked FBC bank instruction circular last week indicates that the monetary authorities, with immediate effect, will prohibit the withdrawal of forex from employees' nostro accounts.

"In cases where the Exchange Control Unit of the Reserve Bank of Zimbabwe has approved in writing the payment of salaries for a company or institution's employees in US dollars, the following terms and conditions must strictly be adhered to:

"Funds should be transferred to individual Nostro FCAs for employees. There shall be no withdrawal of cash from accounts funded under this arrangement," part of the leaked circular dated October 4, 2019 reads.

Under the instruction circular, employees' funds in nostro accounts will be liquidated to the Zimbabwean dollar at the prevailing rate while banks will now authorise the settlement of foreign payment for services and goods after "submission of relevant documentation".

The sweeping regulations, which come a few months after government gave assurances that depositors' funds in nostro accounts will not be raided, has sparked fierce criticism and has once again brought to the fore government's policy inconsistencies.

In October 2018, Finance minister Mthuli Ncube said: "I want to assure you that these FCAs will not be raided. They have been ring-fenced. These are kept offshore and you have a mirror account (domestic) which reflects those accounts. You know what happened the last time we did that when we shut them down, the US dollar just disappeared. So we have learnt that if you raid these FCA, if you shut them down, the US dollar disappears and you go back to disintermediation, which is what we have now."

Prior to the latest wave of regulations, the apex bank, in similar fashion, reintroduced the Zimbabwean dollar in June without the necessary conditions to sustain a currency. Ncube had earlier assured the nation that the local currency would only be introduced when the country has a sustainable GDP growth rate of at least 7%, low and stable inflation, six months import cover, an improvement of production, increased levels of savings and investments, among other benchmarks.

Earlier in 2016, government adopted the bond note and insisted that the quasi-currency would trade pari pasu with the US dollar, which was part of the basket of currencies operating in the country, although critics pointed out that such a fallacy could not be sustained.

When the multi-currency system was scrapped in June, leading to the reintroduction of the local unit, government, in a policy somersault, ring-fenced nostro accounts from Real Time Gross Settlement (RTGS) bank balances.

The move, which also rattled the market, effectively meant that government had abandoned the 1:1 trading ratio between the green back and the local unit, resulting in people losing their US dollar savings, which were converted into RTGS balances.

Critics of the latest central bank foreign currency regulations have questioned the legality of such a move, with former finance minister Tendai Biti noting that the RBZ directive would trigger externalisation of funds from Zimbabwe by investors to safe investment destinations.

"Government and the RBZ cannot be experts in doing lawless things because all these are desperate actions by a desperate, despicable regime. You cannot have a government that generates the suffering of its people on a day-to-day basis," Biti said.

"Besides, this issue is unlawful and unconstitutional because a salary is protected by Section 71 of the constitution and no one has a right to appropriate anyone's salary as this will simply force companies and employees to relocate their accounts offshore to countries like Botswana, Zambia and South Africa."

Economist John Robertson said the far-reaching foreign currency regulations would dampen investor confidence, while industries will struggle to import key raw materials and equipment required towards sustaining operations.

"Basically, it is normal in any country in the world to carry out such practices where a remittance has to be paid by exporting companies to the Reserve Bank. The same is also happening in South Africa. The problem here is that there is no confidence in Zimbabwe because you are asking people to exchange a stable currency with an unstable currency. In any country you want a scenario where people know that they will retain their monetary value," Robertson said.

"Inflation is now at 300% or thereabouts so it is a case whereby you know if you exchange your forex for the local currency then it is getting eroded. Let us say a company wants to buy machines for production and they delay the purchase by one week, they may not be able to buy the machine due to inflation because the price would have gone up.

"Two years after the Mnangagwa regime came into power, we are still waiting for government to implement some consistent policies. If you want to be trusted, you have to keep your promises. If you do not, then no one will trust you, simple."

Economist Prosper Chitambara argued that the raft of foreign currency regulations introduced by the apex bank would fuel uncertainty in an economy that is imploding.

"Regulations in Zimbabwe are not good for doing business. If you look at countries that are doing well at the moment you will notice that they have removed such restrictive regulations," Chitambara said.

"Removing such regulations is very important to stimulate economic growth. At the moment, the business environment is constrained and such regulations do not help business in any way. The government is becoming popular for policy inconsistency and that causes uncertainty in the business environment while it increases the cost of doing business."

Critics have argued that piecemeal reforms, such as the central bank's latest foreign currency measures would not extricate the country from the economic crisis.

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