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ADOPTING THE RENMIMBI AS A RESERVE CURRENCY

Barnabas Thondhlana

Countries in east, central and southern Africa are looking at ways to cushion themselves from increasing external debt, valued in United States Dollars, at a time currency reserves for most member countries are dwindling.

As a result, central bank deputy governors of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) are meeting in Harare over two days to dialogues and strategise on the weakening external positions of most member countries, following the aftermath of the global economy slowdown.

Top of the agenda is the efficacy of adopting the Chinese Renmimbi as a reserve currency.

As at the end of 2017, official reserves for most countries in the MEFMI region, stood barely at or below the traditional three months of import cover benchmark. Foreign currency denominated public debt continues to increase as well as interest payments, as most countries move to more commercial sources of borrowing to meet their increasing appetite for infrastructure projects.

“Debt sustainability has deteriorated in the region, and already the risk ratings for some MEFMI countries have worsened,” said Dr Caleb Fundanga, MEFMI executive director.

“Furthermore, there has been an increasing pattern of foreign portfolio investment flows in the domestic debt markets, which are volatile in nature and susceptible to reversals. All these point to increasing external vulnerabilities and there is therefore need for the region to act swiftly and implement much needed policy adjustments to ensure macroeconomic stability and strengthening of external buffers.”

Current trends in reserve management indicate that countries should act on the implications for reserve management and should have clear policy options to take. The magnitude and management of reserves can have profound effect on markets and central bank balance sheets.

“The bulk of reserves for most countries in the MEFMI region are invested in United States Dollars. Their composition though, has not kept pace with the large shifts in the world economy, particularly since China and India continue to shape global economic trends as they remain major trade partners for the MEFMI region,” Dr Fundanga said.

“Most countries in the MEFMI region have loans or grants from China and it would only make economic sense to repay in Renmimbi.  This is the reason why it is critical for policy makers to strategise on progress that the continent has made to embrace the Chinese RMB which has become what may be termed ‘common currency’ in trade with Africa.”

Reserve Bank of Zimbabwe Governor Dr John Mangudya, said the ascendancy of RMB in the SDR basket of currencies is an important symbol of its importance and IMF’s approval as an official reserve currency.

“With China as the largest trading partner of over 130 countries, the main challenge for African countries is how to benefit from the new pattern of international commerce,” Dr Mangudya said.

“China is taking a lead in trade in Africa, the continent cannot afford to lag behind in taking advantage of growth-enhancing opportunities with China.  It has been clear over the last five years that trade and investment with the West continues to be limited. The MEFMI region must participate in, and most importantly, identify economic and financial benefits that can be derived from the new reserves management patterns.”

MEFMI is a regional owned Institute with 14 member countries: Angola, Botswana, Burundi, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. The Institute was established in 1994 as the Eastern and Southern Africa Initiative in Debt and Reserves Management (ESAIDARM) with a mandate to address entrenched problems that countries faced. This mandate was expanded in 1997 to include macroeconomic management, and broader aspects of financial sector and debt management, resulting in the birth of MEFMI.

Said Dr Mangudya: “China is taking a lead in trade in Africa, the continent cannot afford to lag behind in taking advantage of growth-enhancing opportunities with China. It has been clear over the last five years that trade and investment with the West continues to be limited.

“The MEFMI region must participate in, and most importantly, identify economic and financial benefits that can be derived from the new reserves management patterns.”

As early as 2000, China had established US Dollar-RMB swap lines with many Asian central banks under which China would provide US dollars in exchange for the local currency of the counterpart economy. In other words, the foreign exchange reserves of China often served as an additional credit facility if the counterparty economy were to face liquidity crisis.

The exchange of swap lines is primarily for the purpose of promoting bilateral financial cooperation, facilitating bilateral trade and investment, and safeguarding regional financial stability.

A crucial difference between earlier swap arrangements and those entered into after 2009 is that the later swaps are in terms of local currencies; that is, the PBoC commits to exchange other central bank’s currencies for RMB. By september 2015, 34 central banks had signed these swap arrangements, with a total value of roughly half a trillion dollars (US$495.8 billion or RMB3.16 trillion).

In Africa, only the South African Reserve Bank has entered into such an arrangement, valued at US$4.7 billion (or RMB 30 billion).

“The modest amounts notwithstanding, the PBoC is clearly making an active effort to make the central banks of a broad group of economies comfortable and familiar with RMB-denominated instruments and financial facilities,” Dr Mangudya said.

“In most MEFMI countries, the size of the preferred habitat of reserves and short-term government debt has not kept pace with the increase in reserves. This can have profound effects on interest rates on the one hand, and on the other hand on decisions of reserve managers who have to move outside the preferred habitat, with all the attendant potential consequences on the balance sheets of central banks.

“As a region, we cannot afford to lag behind on matters of economic development, particularly reserves management. it is our role as fiscal and monetary policy custodians to ensure that we move in tandem with the rest of the world in eradicating poverty and attaining global economic development goals,” he said.

 

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