confidence

RBZ REGULATIONS ON FOREX MAY HURT INVESTOR CONFIDENCE
The new central bank regulations on real estate property sales is now limiting the money that can be accessed by the seller to the initial $50000 and the rest will only be accessed over a year. This is what was contained in the monetary policy statement in late July 2011 and implementation seems to have started only now. The rationale for this according to the central bank is that the economy is not benefitting from real estate transactions because the proceeds are being kept outside the country hence prejudicing the country. It then goes on to note that since dollarization there has been what it terms ignorance by traders on the exchange controls which it believes it should still enforce even though it does not control much of the economy. In the statement it mentions that it is the custodian of the capital account and as such it has been perturbed by the movement of funds in this account without its approval and this especially in an environment of liquidity shortages. By enforcing these regulations it believes it can stem the problem of illiquidity and help to resuscitate the economy. However the central bank appears to have developed a short memory of what brought us to this and unfortunately this move might hit badly on the very fragile investor confidence, a prerequisite for any country wishing to attract foreign direct investment. Unfortunately for the central bank though not everyone shares this amnesia; potential investors and citizens still remember the economic turmoil of the last decade in which the central bank’s actions played a major part. By its owned admission the central bank used funds of foreign currency account holders without their consent and it printed money thus fuelling inflation. Whether these acts were benign or not is besides the point, it is the implications for the central bank that I wish to put into perspective here. After raiding private accounts the central bank lost credibility and trust because that action constituted what may be termed a property right violation if we are to use more diplomatic language and it’s not clear if all its victims have been compensated. Subsequently investors or traders have since adopted ways of trying to circumvent or avoid having their money stuck in the country’s financial system particularly the central bank and this is corroborated by Zeparu a local research firm. It concluded in one of its surveys that a significant part of the trading population remains unbanked because people still do not have confidence in the financial system after the traumas of losing savings at the hands of banks at the height of hyperinflation. Zeparu estimates as much as $2.5 billion circulates outside the formal system and that if true is an indictment against the entire financial system the RBZ included. In light of this it’s hard to understand why the central bank now wants sellers of property to give it custodianship over their money for about year with an interest earning potential through this so called involuntary surrender requirement. As stated earlier confidence is a very fragile attribute and once it’s ruined it will take a long and painstaking effort restore it and certainly the central bank has not done that yet. If the central bank insists on this, the obvious result would be the slowing down of business in property sales and the foreign investment that was flowing into this industry will dissipate. No one especially now believes the central bank will honour its obligations at the end of the year as it has lost its function of issuing currency when we adopted the multiple currency system. In fact the central bank has been a peripheral figure in the economy since dollarization of the economy largely because it cannot issue currency and its heavily undercapitalised hence cannot perform some of its traditional functions. There has been no interbank trade since formal dollarization of the economy and there has effectively been no lender of last resort because the central bank remains insolvent perhaps that’s the down side of dollarization. To that end it has since called for the return of the local currency and this latest effort is testimony showing the central bank’s exasperation with the limitations brought to it by dollarization. It is quite a paradox for the central bank because confidence in the economy has been partly restored because the RBZ has been side-lined with stakeholders apparently satisfied with this arrangement thus far. On the other hand liquidity problems continue because as explained in the monetary policy there is no lender of last resort hence financial institutions are taking extra cautious steps by avoiding lending that would cripple them. Industry has been the major victim of this yet it is the general economy that will continue to suffer as companies that could potentially do well remain constrained by low capitalisation. The solution to this at least in the interim lies in restoring the credibility of the central bank, a very important step if we are to assuage every stakeholder. In that regard reforming the central bank has to be the number one priority at the moment, a change in its structure, the right check and balances and its independence from executive are paramount changes. If a change in personnel at the central bank is what it is going to take to get stakeholders to have confidence in the central bank once more then logic has to prevail over narrow politics. Additionally recapitalising its operations is also very important because at the moment if there is going to be turmoil in the banking industry the central bank does not have the capacity to intervene and salvage the situation because it does not have the resources to do this. In the monetary policy statement the central bank acknowledges the $7 million extended to it by treasury for its recapitalisation yet this is just a miniscule of what it is actually needed and thus more will be needed if enough capitalisation is to be achieved so as to fully restore the credibility and function of the central bank. It is such a fine line between protecting the country’s economic interests and spooking investors hence authorities always have to be mindful of this when contemplating new regulations.

Terence Zimwara is an economic analyst contact him on tem2ra@yahoo.com
ZES articles are coordinated by Lovemore Kadenge contact him kadenge.zes@gmail.com and tel 0772 382852