The Confederation of Zimbabwe Retailers (CZR) held a Breakfast Meeting on the Ban on Kaylite & cash shortage & on 25 July 2017 at Crowne Plaza/Monomotapa Hotel. These gatherings have become synonymous with CZR as we try to contribute to efforts to finding a lasting solution to the cash crunch. In what could be an effort to tap from expert views, we invited a renowned Senior Economist and Acting Country Director of the World Bank, Dr Johannes (Han) Herderschee as the Guest Speaker. Also, to achieve continuity of the discussions as well as to tap from local expertise, CZR invited two distinguished Economists as Key Note Speakers, namely Professor Ashok Chakravarti and Dr.Persistance Gwanyanya. Importantly, the three gentlemen agreed with CZR on the root causes of the country’s cash crunch as pointed by CZR President, Mr. Denford Mutashu, in his speech. The country’s cash crunch is essentially rooted in the unbalanced state of the economy occasioned by low levels of production to support its elevated consumption. Worryingly, this consumption is largely being satisfied by import, thus sucking out liquidity from the market. As such, a permanent solution to the cash crunch lies in rebalancing the economy through revamping production whilst reducing consumption, which will concomitantly reduce imports. Needless to mention that if left unchecked, illicit financial flows would weigh down all efforts to address the liquidity crunch, which underscores the need a proper approach to dealing with this challenge.
The panellists observed the need to deal with emerging Black Market for currencies, which is thriving on the back of persisting cash shortages. The extension of the parallel market for Bond Notes into neighbouring countries like South Africa, Zambia, Mozambique and Botswana bears testimony to the growth of these nefarious activities. Well, this could just be manoeuvres by enterprising citizens to capture a wider market for currencies in absence of a permanent solution to the cash crisis. To this end, the existence of arbitrage opportunities offered by the artificial exchange rate of Bond Notes, which are currently pegged at par to the US dollar, was singled out as major driver of the black market. As such abandoning the currency peg was discussed as a possible solution to this challenge. However, other consideration such as the terms of the Afreximbank facility supporting the surrogate currency would be important for more informed recommendations. Importantly, it was noted floating the exchange rate for Bond Notes would not offer a permanent solution to the country’s cash crunch as long as production and exports remain low.
As discussion to revamp production took centre stage, the issue of the choice of Reference Currency was widely discussed. It was agreed that the country can improve its competitiveness by adopting a weaker currency, preferably the Rand, as a reference currency. The dominance of the US dollar in transactions is taking toll on competitiveness. While usage of rand as a reference currency would be desirable, the panellists agreed that the joining the Common Monetary Area (CMA), in which the rand is used as an anchor currency is not a viable option today as it entails that our monetary policy would be controlled by South Africa. The preference of the Rand was mainly based on the high level of integration between South Africa and Zimbabwe (60 percent). Importantly, this would allow access to South Africa’s capital markets for constant supply of Rands. However, it was noted that despite calls from the market to adopt the Rand, policy makers have not been warm to this idea. Ostensibly so because the country’s challenges are beyond a currency solution. They can be traced to underperformance in production, which can be addressed through implementation of appropriate business and investment policies to attract and retain both Domestic and Foreign Capital needed for Reindustrialisation.
The panellists agreed that managing the cash situation will largely depend on the approach taken by policy makers. It was noted that during a crisis, the temptation is always high for policy makers to force market participants to comply. In any case the RBZ has the necessary tools to do so. It can invoke the Bank Use and Promotion Act or the Anti Money Laundering Act. However, despite this, the Central Bank has not been aggressively pursuing perpetrators. It has only been invoking these acts where cases of noncompliance were appalling. Reasonably so because force does not always yield compliance, especially in a crisis. Sometimes honest dialogue would produce the desired results. Despite a calculated approach to minimise chaos in the market, the RBZ has not completely paid a blind eye on errant market behaviour. Notable incidences where the RBZ had to intervene include where some major Retailers did not even own a local bank account and as such were not depositing their daily takings at all. Market elements who were fuelling Black Market for currencies as well as leading the three-tier pricing system were similarly pursued.
Importantly, the RBZ was complemented for resisting the temptations to participate in the parallel market for currencies despite pressing funding needs. Clearly, any attempt to do so would fuel the parallel market for currencies. Worse still, it would weaken the Central Bank’s power to regulate market participants. Those who lived during the hyperinflation era know better. Instead of participating in the parallel market, the Central Bank has been relying on other measures such as foreign currency allocation prioritisation and incentive mechanisms to grow the currency generating capacity.
The panellist noted with concern the limited efforts to solve the cash crunch from other stakeholders. Undoubtedly, with a Cash and Nostro funding gap of more than $300million, the illicit foreign currency dealings will be difficult to control with single effort. As such there is need for increased private sector participation in the cash conundrum. However, lack of incentives was noted as a major discouraging factor for this participation. Line Ministries should equally complement RBZ’s efforts, noting that Monetary Policy is impotent to influence the direction of the economy under dollarization. In the absence of these efforts, even the reported increase in Bond Notes would only provide a temporary relief to the cash crunch. Therefore, the Bond Notes exchange range of 1:1 to the US dollar will remain difficult to sustain. Even the suggested abandonment of the peg is not a permanent solution. This underscores the need to Increase Production as a precondition for the reintroduction of the local currency. Any attempt to reintroduce the local currency before these issues are sorted out is fraught with danger. Those who lived during the hyperinflation era know better.
Nostro funding challenges are taking toll on the economy given the high import dependence in the country. Clearly, RBZ has limited capacity to arrange additional Nostro lines of credit above the $70million, which is being shared by all the banks, due to high indebtedness. As such, the private sector should increase its participation by structuring some innovative, collateralised, self-liquidating and ring-fenced funding structures. This would also reduce their business costs noting that the bulk of these players are sourcing their money from the parallel market at exorbitant costs. However, it was noted that increasing Exports would offer a permanent solution to the Nostro funding challenges. The efforts to liquefy the local economy should be complimented by increased usage of electronic money. Regrettably, after an encouraging uptake, the electronic payment systems are experiencing challenges due to increased system down time, errors, reversals and duplication. This underscores the need for the banks to invest in efficient electronic payment systems. There may be need for RBZ intervention through setting standards to the banks. The Central Bank should champion infrastructure sharing by expediting the introduction of mini POS machines, which can be operated by many players. These gadgets would serve the informal sector more efficiently. The Telecoms Operators should equally expedite the issue of infrastructure sharing to improve network connectivity.
The recent downward review of bureaux de change registration fees was complemented as it encourages participation in the formal trade of currencies. Increased access to currencies in the basket of multiple currencies is necessary to minimise the inordinate exposure to the US dollar. However, there is need to ensure that these forex traders are appropriately regulated because they can end up fuelling the parallel market like what happened before their closure in 2001. As noted earlier, the need policy makers should come up with incentives for participating in formal trade of currencies was emphasised.
Importantly, panellists observed the need to deal with the root cause to this cash crunch for a permanent. The following were recommended by the body;
- Revamp the country’s production through adopting appropriate policies to attract and retain capital, both foreign and domestic.
- Though adoption of the Rand as Reference Currency would be a desirable option to increase competitiveness and sustain dollarization, it is not a permanent solution to the cash crunch if deep the seated structural challenges are not addressed.
- Strengthen the electronic payment system through investment in efficient infrastructure as well as driving the idea of infrastructure sharing-especially Mini POS machines.
- Improve network connectivity through expediting electronic sharing in the Telecoms sector.
- Reduce public sector expenditure through engagement. This should be complemented by bold action to privatise some parastatals that continue to drain the Fiscus.
- Manage the parallel market for currencies through an incentive system to formalise.
- Overtime, the country should abandon the Bond Note peg to make it the bond notes local currency. (This will only be sustainable when production has increased to acceptable levels).
- There is need to tame corruption from the source.
- CZR will continue to engage policy makers and the relevant stakeholders on improving the cash situation.
Production was the buzz word during the Cash shortage discussion.
The Environmental Management Agency (EMA) sent its apologies as they were called to attend an urgent critical meeting with The Ministry. Manufacturers, Distributors & Suppliers of Kaylites were present and shared their emotional views on the Ban. They were mixed feelings and reactions as some were of the notion that the Ministry and Government had given people ample time. With the majority calling for an extension of more than 3 months to clear their current stocks, the outcry was on the little or no consultation at all from EMA.
Manufactures & Suppliers challenged EMAs decision to ban Kaylites as outrageous and they feel short-changed as they had been unconvincing Research on the Ban. One gentleman in attendance interrogated the whole promulgation as he questioned why The Ministry of Health is not in the picture. ‘If use of Kaylites causes cancer, smoking is harmful to health and not a secret to its damaging capabilities, products causing Diabetes why are we still using and allowing them?’ he asked. There was a heated debate that took centre stage as no ultimate solution seemed to come out on this discussion.
Chairperson of The Zimbabwe Polystyrene Packaging Council of Zimbabwe Ms Melody Frank responded to some of the burning questions in the Great Indaba Hall. The Council didn’t have a clear solution at hand but reiterated the need to adopt to suggestions postulated by the Research students who claim to have made the cancer tests. This measure by EMA is facing stiff resistance from the market as some manufactures had recently invested state of the art machines, which as we speak are redundant with immediate effect. Calls are being drawn from these manufacturers that it will be prudent for them to continue manufacture locally for Export. Some Suppliers believe if the ban is successful it would affect the consumer as alternative packaging solutions might be quite expensive compared to price of Kaylites which was next to nothing.
Some manufactures who spoke on anonymity in the house argued that EMA & the Ministry did justice on educating and urging the relevant stakeholders in 2012. From that basis the local manufacturing packaging company had already complied to that effect since then as they came up with recycled packaging paper solutions.
This article was written by Persistence Gwanyanya and Stanley Bote. Persistence is the founder of Percycon Advisory Services, which specialises in trade finance, corporate finance and opportunity development. For feedback use firstname.lastname@example.org or whatsapp at +263 773 030 691. Stanley, Chief Marketing Officer at The CZR email@example.com 0776325575 voice calls or 04) 74081